Investors almost always expect markets to react to current disruptions the same way they reacted to similar disruptions in the past.
We’re seeing that today with the spread of the coronavirus.
Already, analysts and market commentators are citing what happened in 2003, when spreading SARS deaths knocked the market down, but stocks ultimately ended the year considerably higher.
The question “is this time different?” is generally shrugged off because investors believe they know what markets did then and what they’ll probably do now because of it.
But what if this time is different?
What if investors aren’t looking at the big picture and how both China and the world have changed? What if investors forgot that something else lifted the market in 2003 and had nothing to do with SARS containment?
How SARS and the Coronavirus Differ
The SARS (severe acute respiratory syndrome) epidemic, originating in China in 2002, ultimately infected 8,098 people and killed 774 before it was officially “contained” by the end of March 2003.
That’s a mortality rate of 9.5%.
SARS is a coronavirus. The current epidemic is also a coronavirus, only it hasn’t been assigned a name.
Coronaviruses, named for the corona or crown evident in the virus’ shape, are a group of viruses that cause diseases in mammals and birds and can transmute to infect humans.
As of this morning, January 28, 2020, the coronavirus has infected 4,515 people and killed 106.
That’s a mortality rate of 2.3%.
But those numbers don’t tell the whole story, not even close.
SARS had an incubation period of two to seven days. The coronavirus has an incubation period of one to two weeks.
That means that SARS symptoms showed up quickly, alerting people they were infected. A two-week incubation period, where people have no idea they’re infected, means they’re likely to spread the virus further and faster as they interact with more uninfected people over a longer period of time and across the globe.
Coronaviruses are spread by droplets; by sneezing, coughing, shaking hands, or contact made with infected surfaces.
The coronavirus has already spread further and faster than SARS did. And given its long incubation period, authorities believe the infection rate will continue to outpace efforts to contain its spread.
U.S. equity markets, after falling 10% on SARS news from late 2002 through March 2003, arrested their slide by the end of March and ended 2003 up a whopping 26%.
But investors forget it wasn’t the containment of SARS that boosted the market.
The U.S. invaded Iraq in March 2003.
That’s what arrested the market’s backsliding. Stocks rallied the rest of the year after the overwhelming defeat of Iraqi forces.
China’s Global Economic Position Matters More Today
Another gigantic difference between what happened in China in 2003 and what started in China in 2020 (maybe 2019 according to some healthcare officials) is China’s position in the global economy.
China’s GDP for 2003 was $1.66 trillion. The country’s GDP for 2019 was $14.3 trillion, according to IMF data. That’s an unbelievable, but true, 760% increase in gross domestic product.
Over the same period, U.S. GDP grew from $11.51 trillion to $21.44 trillion in 2019. That’s an 89% increase.
The point is China’s exponentially larger economy will be more impacted now by quarantining whole cities, currently more than 60 million people and counting, than investors realize.
Besides China’s overleveraged economy being shut down, global supply chains are being shut down as Chinese factories and production facilities and companies are closed.
This time is different.
Whether the market impact of this coronavirus will ultimately prove that the past repeats itself is a highly leveraged bet.
I don’t think investors are worried that this time might be different.
But they should be.
You’ve been warned.