The History of Pandemics and Stock Markets

The economic consequences of historical epidemics and pandemics vary depending on location and era. The epidemics of the 18th and 19th centuries had limited financial effects, largely because they were localized epidemics that lasted a few months and not pandemics that affected the entire planet. Most securities holders were wealthy enough to relocate, leaving most of the suffering and death to the lower classes. Moreover, because different cities had their own stock exchanges, cross-market arbitrages prevented crashes in the cities hit by an epidemic.

However, as globalization emerged, worldwide pandemics created a different reality. Travel spread disease to all corners of the earth and with it came investor panic.

1780s: Smallpox

In the late 18th century, smallpox ravaged Europe. A vaccine was created in 1774 to immunize folks against the disease with the anticipation that it could increase the average lifespan by three years. However, France banned inoculation against smallpox for fear that it would thwart the will of God and worsen the pandemic. 

In the 1700s, the French government would issue a life annuity and pay a fixed amount of money to the recipient each year until they died. Investors in Geneva took advantage of these annuities by buying them in the name of 30 girls from good families whom the investors expected to have long lives. 

As smallpox worsened, the country began issuing life annuities that paid 10% interest with the anticipation that the average lifespan would be 20 years. However, the Genevan investors wanted to receive 60 years of returns, so the bankers agreed to pay for the medical care of the girls for whom they bought life annuities. Only two of the 30 girls died within 20 years, and on average, the girls lived to be 63.    

1793: Yellow Fever

Yellow Fever hit Philadelphia—what was then the U.S. capital—in late summer and lasted several months. Between Aug. 1 and Nov. 9, the epidemic killed about 10% of the city’s population of 50,000 and prompted 20,000 residents to flee.

During the epidemic, the securities market did not crash but simply shut down. The prices of U.S. 6% bonds (Sixes) and shares of the Bank of the United States (BUS) — two of the nation’s most important securities — dipped slightly in early August before rebounding and even increasing until quotations for the Philadelphia market stopped in early September. Sixes dropped from $90 (per $100 bond) to $88.75 before hitting $91.67, while BUS shares went from $420 to $412 before jumping to $428. This suggests a “flight to quality” scenario as some wealthy Philadelphians chose to sell real estate and species for more liquid and transportable safe assets. 

The reaction in the New York market was similar. When quotations began again in Philadelphia on Jan. 1, 1794, BUS shares were at $440 in Philadelphia and $444 in New York, and Sixes were at $90 in both markets. The temporary halt of trading in Philadelphia did not damage market integration. Rather, Philadelphians just did business in New York during the hiatus.

1798: Yellow Fever

Yellow Fever hit New York in 1798 and killed 2,100 people out of the city’s population of 35,000 between July and October. That year the state had chartered the Manhattan Company to alleviate fever outbreaks by supplying purer water to the city. However, a clause in the charter allowed any surplus capital the company had to be “employed in the purchase of public and private stocks, or in any other [legal] moneyed transactions or operations.” This prompted the company to do more banking than supplying water. 

Securities prices rose during the epidemic and were significantly higher by December: Bank of New York from 132% to 134% of par; BUS from $464 to $500; U.S. Deferreds from $63.75 to $67.50; U.S. Sixes from $73.75 to $80; U.S. Threes from $45 to $50.

1832: Cholera

After reaching New York in 1832, the Cholera epidemic killed about 3,500 of the city’s 250,000 population (a mortality rate of more than 100,000 when applied to the city’s current population). As people fled the city in light of the epidemic, Fives—the most liquid U.S. government bond at the time, paying 5% interest per year—traded above par throughout the summer at a range of $103.75 to $104.125 (per $100 principal). This was largely because most trades were over-the-counter and through brokers who could conduct business even when out of the office.

The stocks of private commercial banks, like the Bank of America, Butchers, and Drovers, and Chemical, also remained range-bound all summer, as did the shares of insurers like New York, Neptune, and Merchants Fire. New York Gas Light also traded in a range between $145 and $155 throughout the summer.

Railroads, however, exhibited a more complex pattern. Harlem dipped at first, from $105 to $95.50 per share, in late July before rebounding to $103 by the end of August. The Mohawk and the Paterson and Hudson Railroads both dropped by $15 to $20 per share over the summer and recovered much more slowly, not returning to their 1832 highs until April 1833.

1858-1859: Scarlet Fever

Scarlet fever killed 2,089 people, most of whom were 16 years old or younger, in Massachusetts between December 1858 and December 1859. Some of the children were employed, but the labor force exceeded 450,000 people so the effects of the epidemic were more emotional than economic. Those who were ill were quarantined, but healthy people continued business as usual. 

The Boston stock market was in bull mode throughout 1859. Most bank and some insurance stocks remained range-bound, but other insurers, including American, Boston, Boylston, City, and Commercial were up strongly. In addition, the Boston and Lowell Railroad increased from $89 to $98 per share over the year, and the Boston and Providence and Boston and Worcester railroads rose modestly.

The biggest gains of the year were in manufacturing. Amoskeag was up from $890 to $1,000 per share over the year, Appleton from $950 to $1,000, Bates from $85 to $106, Boott from $470 to $725, Boston and Roxbury Mill Dam from $29 to $50, and Boston Duck from $375 to $500.

1918-1920: Spanish Flu

The flu killed about 40 million people or 2% of the world’s population between 1918 and 1920. In the U.S., about 550,000 died of the flu, or half a percent of the national population. World War I was in its last year in 1918, so the overlap makes it difficult to isolate the economic and financial effects of the war and pandemic individually. 

Economists estimate that both the war and flu depressed real GDP growth and consumption spending, as well as raised inflation in both the world and the U.S. The flu itself reduced real stock returns in the U.S. by seven percentage points and returns on short-term government debt by 3.5 percentage points. Meanwhile, it raised U.S. inflation by five percentage points. 

1957-1958: Asian Flu

The flu killed approximately 1 million to 2 million people worldwide. In the U.S., the first wave affected mostly schoolchildren in October 1957, while the second wave in 1958 mostly affected pregnant women and the elderly. An estimated 70,000 to 116,000 people died in the U.S.

The U.S. had entered an economic recession in August 1957 that lasted through April 1958, though the media at the time did not cite the pandemic as a cause for the economic decline. The Dow Jones Industrials Average peaked on July 12, 1957, and then dropped 19.4% to a low on October 22. 

When the recession began, the pending flu problem was known to health experts, but with a developed vaccine officials were ahead of the virus before it reached the U.S. This encouraged investors. The stock market’s decline began before the recession and before the public became aware of the flu problem. 

Better reasons for the late October lows were a confrontation that fall between federal officials and Arkansas’s governor over the integration of public schools, and especially rising Cold War tensions.

2003: SARS

The Severe Acute Respiratory Syndrome (SARS) outbreak infected a total of 8,098 people worldwide, killing 774 of them, mainly in China and Hong Kong. While SARS broke out in Nov. 2002, it did not begin to affect markets until March 2003 after the Chinese authorities reported the SARS outbreak to the World Health Organization. At that time, the S&P 500 lost 12.8% of its value. In addition, the MSCI China Index underperformed compared to its global peers—though it made up the loss only six months later.

All 11 S&P 500 sectors declined during the SARS outbreak, with information technology, financials, and communication services among the biggest losers, falling 14%, 16%, and 26%, respectively. In China, the equities that performed the worst were tied to the retail, travel, and leisure industries. Pharmaceuticals was the best performing Chinese domestic industry, gaining 11% on anticipated demand for medication. Once the broader market rebound began, three out of the five worst-performing sectors moved to the top five: airlines, diversified financial services, and software.

Economists estimate SARS caused a global economic loss of $40 billion, with the world GDP suffering a 0.1% hit.

2013-2016: Ebola

The Ebola epidemic in West Africa caused 11,310 deaths in Guinea, Liberia, and Sierra Leone, and 15 deaths outside of these three countries. Between December 2013 and February 2014 the S&P 500 fell 5.9%. The sectors most hurt by the epidemic were airlines, cruises, and hotels. Shares of American Airlines and Delta Air Lines both dropped 20% in October 2014 after news that an Ebola patient flew the day before being diagnosed. 

The Cboe Volatility Index (VIX) spiked 90% over the course of one month in October 2014 as wild market swings became the norm. However, other negative headlines also contributed to the volatility, including Europe’s economic downfall, an energy price meltdown, and new gains by ISIS in Iraq.

Nonetheless, some stock saw incredible gains at the time. Tekmira Pharmaceuticals saw its stock rocket 200% over the course of 2014 as it worked on an experimental Ebola drug. In addition, Hazmat suit maker Lakeland Industries saw its stock price soar almost 300% between August 2014 and October 2014.

2020: COVID-19

The global coronavirus pandemic has brought one of the greatest human and economic consequences the world has ever seen. 75.2 million people were infected with the virus worldwide, with a reported 1.67 million deaths as of Dec. 18. In addition, the pandemic is expected to plunge most countries into recession in 2020, with per capita income contracting in the largest fraction of countries globally since 1870. The World Bank’s baseline forecast predicts a 5.2% contraction in global GDP in 2020—the deepest global recession in decades.

Investors saw a massive spike in the VIX in early March as COVID-19 hit the U.S., prompting markets to tumble. In late March, markets began a historic rebound and recovery that brought the VIX back down—but not down to pre-pandemic levels. In June, the VIX had another spike (though much lower than in March), and again around the U.S. election. 

Shares in the S&P 500 dropped 31% in March before rebounding to new record highs. Industries that took the hardest hit include travel and leisure and retail. By the end of 2020, markets had rebounded and the S&P 500 had returned more than 12%. The tech-heavy Nasdaq soared to returns of over 40%.