As fear works its way through financial markets, it might be helpful to review a brief history on pandemics to help keep things in perspective.
Spanish Flu of 1918-19
The world was a different place in 1918. Europe was ravaged by World War I, and antibiotics had not yet been discovered. The flu is a virus, but people often die from secondary complications caused by bacterial pneumonia. The Spanish Flu killed an estimated 675,000 Americans – and this was when the U.S. population was only around 106 million! A deep recession set in during 1920-21 that is attributed mainly to the after-effects of war and returning veterans. The Dow Jones Industrial Average fell 35% in 1920 to close the year at 72. But it rebounded and soared to 381 by the end of the decade.
Asian Flu of 1957
The Asian Flu of 1957 broke out early in the year and came in two waves. The first wave infected relatively few people, but the second wave was particularly devastating and killed an estimated 69,800 Americans. According to the Federal Reserve Bank of St. Louis (FRED), real GDP dropped about 3.5% in the 4th quarter of 1957 and the 1st quarter of 1958. The S&P 500 index finished the year down 14.3% in 1957 but rebounded 38.1% in 1958. The total decline in the index – excluding dividends – from top to bottom (8/2/56 to 10/22/57) was 21.6%.
Hong Kong Flu of 1968
According to the CDC, the Hong Kong Flu of 1968 killed an estimated 100,000 Americans and 1 million people world-wide. According to FRED, U.S. real GDP grew about 3% from mid-1968 through 1970. The S&P 500 index finished with a gain of 7.7% in 1968, a loss of 11.4% in 1969 and a small loss of .1% in 1970 before rebounding in 1971. The total decline in the index – excluding dividends – from top to bottom (11/29/68 to 5/26/70) was 36.1%.
The Other Viruses in the Last 40 years
Click image below to view PDF.
The Current Downturn in Stock Prices
At its peak in mid-February, the S&P 500 was trading around 19 times forward earnings of the companies that comprise the index. The 5-year average is around 16.7 – and a little lower for longer time periods. In other words, perhaps stocks were getting a little ahead of themselves.
The virus undoubtedly will impact 2020 corporate earnings – we just don’t know how much. But if history is a guide, we will get past this Coronavirus, and investors will begin looking to 2021 earnings estimates, which are currently around 195 per share. At a 16.7 P/E multiple, that would put the S&P 500 at 3,256. Given extremely low bond yields/interest rates, a multiple of 18 is arguably reasonable, and this would give us a potential valuation of 3,500. This is in no way a market prediction – simply a way of reminding you that numbers ultimately matter when it comes to valuations.
I know that staying the course during times like this are difficult. But please remember that reacting to market developments has historically been a bad idea. I remain confident and optimistic that investors will be rewarded for staying invested.