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How have share markets reacted to previous pandemics?

The ASX has been bathed in red this week as the spread of coronavirus paints a dire picture. Panic has gripped the market with the S&P/ASX 200 Index (ASX: XJO) free-falling 9.7% on Monday, losing some $160 billion in value.

Following a minor recovery yesterday, the ASX 200 is down another 4.6% today at the time of writing as investors take stock of the latest round of government restrictions. 

But while it may seem like the end of the world, it most assuredly is not. Share markets, including the ASX, have survived pandemics and other disasters in the past and gone on to prosper. ASX shares will also survive coronavirus.

What history shows us

Current fears have prompted a rush to safe-haven assets such as government bonds, which is in line with reactions to previous threats. There have actually been a number of known flu pandemics which have impacted the Australian stock exchanges since the first (the Sydney Stock Exchange) opened in 1871. 

In 1918, the Spanish flu pandemic took hold. Just like today, Governments of the day attempted to limit or delay its spread with containment measures. Share markets were surprisingly unaffected by the Spanish flu, which caused the deaths of between 30 million and 50 million people. 

Of course, the Spanish flu occurred while World War I was raging so the market was already depressed. The Spanish flu subsided in February 1919 (following the end of World War I in November 1918) and the Dow Jones Industrial Average climbed 50% in the following few months. 

In more recent times, share markets have weathered the Swine Flu and SARS epidemic. Like coronavirus, SARS appeared in China, emerging in 2002. It quickly spread to 26 countries and resulted in more than 8,000 cases in 2003. Yet the All Ordinaries (ASX: XAO) powered up 11% in the six months after the World Health Organisation announced it was investigating the SARS outbreak in March 2003. 

More recently, the Swine Flu pandemic took hold. Detected in people in the US in April 2009, by April the following year there were an estimated 60.8 million cases. The ASX had already been shaken by the GFC in 2007 and 2008, with the ASX 200 losing more than 40% of its value between November 2007 and April 2009. Yet in the 12 months from April 2009, the index was up more than 30%. 

Foolish takeaway

Historically, share markets have bounced back from pandemics. The ASX 200 has now fallen around 30% from its February peak, well and truly entering bear market territory. Importantly, share markets try to anticipate the future, for example future earnings and the future impacts from coronavirus.

Six months or a year from now, we will be able to look back at the current decline and judge whether it was an overreaction. In the meantime, we’ll just have to hold tight and ride the volatility. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.