Will the coronavirus derail the bull market? Here’s what history suggests

Markets sold off in the wake of the coronavirus outbreak, but have since rebounded. Could the scare really end the bull market? Dominic Frisby looks to similar past cases for clues.

As I begin today’s Money Morning, British Airways has just announced that it is suspending all flights to and from mainland China. As they arrive in Queensland, Australia has quarantined the Chinese women’s national football team. Coronavirus cases have now been confirmed in Tibet and the UAE.

So these nations can be added to a rapidly-increasing list which includes China, Thailand, Taiwan, Japan, Singapore, South Korea, Vietnam, the US, France, Australia, Malaysia, Nepal, Germany, Sri Lanka, Cambodia, and Canada.

It’s hard to know whether there is too much panic or complacency. Markets sold off heavily from Friday to Monday, but since Tuesday have rebounded with conviction. So I thought it would be instructive today to compare the coronavirus to its most obvious predecessor, SARS.

How SARS affected the S&P 500

SARS. Remember that? Severe acute respiratory syndrome. It also originated in China, back in November 2002. Between then and July 2003, some 8,098 people were affected in as many as 28 countries, and 774 of them lost their lives – a fatality rate of 9.6%. No cases have been reported since 2004.

SARS originated with bats. It seems the coronavirus also originated with animals before spreading to humans. Indeed, SARS itself was a coronavirus. The scientific consensus seems to be that today’s coronavirus is more contagious, but less deadly than SARS. Within just a few days, the coronavirus seems to have spread almost as widely as SARS (roughly 5,000 cases in more than 20 countries), though with fewer fatalities – 106 deaths so far.

In the broader context, the US stockmarket – as represented by the S&P 500 – was in a multi-year bear market in the lead up to the SARS outbreak. This bear market followed the excesses of the dotcom bubble. Having peaked in 2000 at 1,550, it was making its way down to its eventual low of around 770.

However, the SARS outbreak, which began on November 27, 2002, actually coincided with a high in the S&P. At the time, the index appeared to have made a double bottom around 780, or just below, and was now rebounding. As it turned out, the S&P ended up making a triple bottom around this number – a level that would not be seen again until the Global Financial Crisis, six years later.

So the S&P sold off quite heavily, going from 940 to below 800. However, it is worth stressing that even although the outbreak occurred on 27 November, SARS did not really make the news until February – two months later.

Canada's Global Public Health Intelligence Network picked up on the news and sent it to the World Health Organisation (WHO), but there wasn’t even a report in English until 21 January. The story didn’t reach the public until February 2003, when an American businessman traveling from China – Johnny Chen – was taken ill on a flight to Singapore.

The plane landed in Hanoi, Vietnam, and he was rushed to hospital. The medical staff quickly fell ill with the same symptoms and the threat was reported to the WHO. In early March the WHO issued a global alert. The same week that global alert came, the S&P 500 made its final low.

By the time the WHO declared that SARS was contained in July, 2003, the S&P 500 was already well on its way into a new bull market. In other words, the SARS outbreak had very little effect on markets. The S&P was at peak pessimism anyway. The story would have been known before the WHO’s global alert, and some of the S&P’s sell-off in the weeks before could be attributed to that. But, in bigger picture terms, the effects were minimal.

The coronavirus is unlikely to derail the bull market

Fast forward to today, and, of course, the market had a big wobble on Friday. But that same wobble was long overdue. The S&P had just been on one of its longest runs in history. It needed a reason to sell off.

We don’t yet know how bad this coronavirus is going to be, of course. It seems that decisive action is being taken to stem the threat. If transport systems continue to be shut down that is going to hurt Chinese GDP. But, ultimately, my gut (and I stress I speak with zero authority) suggests it will get a bit worse before it gets better, but eventually the thing will be brought under control.

The big difference between then and now is, of course, that back then the S&P 500 was at the end of a bear market. Today we are within a few points of all-time highs in a bull market that has gone on for what seems like forever.

That bull market will go on for as long as it will go on. But, unless this coronavirus morphs into something much bigger, I can’t see it being the thing that derails it. I may well eat my words, of course, but I don’t see it having a big effect on Western markets, beyond causing some choppy action in the days – and maybe weeks – ahead.

Daylight Robbery – How Tax Shaped The Past And Will Change The Future is available at Amazon and all good bookstores with the audiobook, read by Dominic, on Audible and elsewhere. If you want a signed copy, you can order one here.


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