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Epidemics and Market Returns

Coronavirus is sweeping the globe.  With 2,500 confirmed deaths and over 80,000 reported cases across 34 countries (as of this writing), this illness has caused an international panic and market sell off.  Because I am not an epidemiologist, I won’t opine on whether this level of panic is warranted.

Nevertheless, what I can do is discuss how coronavirus might affect your portfolio.  Of course, we cannot know the future, but we can try to learn from the past. If we look at how markets performed during prior epidemics, what do we see?

Yun Li at CNBC, recently wrote an article addressing this question, where she stated:

Looking back 20 years, previous epidemics from SARS in 2003 to the Ebola scare six years ago shaved 6% to 13% off the S&P 500 over different lengths of time, according to Citi.

Therefore, we should expect coronavirus to cause a market dip of 6% to 13%, right?  Not so fast.   After digging more into the article, it seemed like the Citi study cherry-picked the time periods of each epidemic to conveniently fit their narrative.  For example, they listed the end of the West Africa Ebola epidemic as February 2014, though the number of Ebola cases peaked 8 months later in October 2014: