How Markets Performed During The Spanish Flu

With equities surging into the close ahead of the weekend, traders are shrugging their shoulders wondering how the hell the market is rallying given the economic damage inflicted by the COVID-19 outbreak, which has been cited as the worst pandemic to hit the United States since the 1918 Spanish flu. This leads to the question, how did the stock market perform during the Spanish flu outbreak? The chart below compares the performance of the DJIA to the weekly mortality rate of the Spanish flu during each of the waves of that pandemic from mid-1918 through early 1919 (as cited in a WSJ article earlier today).

Looking at how the outbreak of the Spanish flu played out, there were basically three different waves of the virus (red line). The first wave in the summer of 1918 was a relatively mild one compared to the other two, and the DJIA’s performance during that wave was essentially flat as it never declined more than 3%. The real damage from the Spanish flu was in the fall of 1918 when the mortality rate spiked up as high as 24 per 1,000 people per week. During that wave of the pandemic, which also came in the thick of a post-WWI recession, the DJIA peaked just as the wave was getting underway and fell for the next three months. Even with the severity of the outbreak during that wave, though, the DJIA never fell more than 11% from peak to trough. On a comparative basis, even after the 28% rally over the last four weeks, the S&P 500 is still down 15% from its high. Obviously, comparing two periods more than 100 years apart is hardly an apples to apples comparison, but it’s still interesting that during what was an even deadlier pandemic in 1918, the DJIA never even approached anything close to a bear market.

Looking at the chart, the DJIA’s low of the decline coincided with the second wave of the outbreak just as the third (more mild) wave of the pandemic was getting underway. Furthermore, during that third wave, the DJIA kicked off what was a strong rally of more than 25% in less than three months on optimism over an end to the outbreak.

So, once the mortality rate of the Spanish flu dropped down to zero, it must have been nothing but clear skies ahead for the Dow, right? Well, not necessarily. When it comes to the stock market, there’s always something. Less than a year after the mortality rate from the Spanish flu dropped down to zero, the US economy actually went into a year and a half long recession. That contraction was so severe that it has been dubbed the Depression of 1920/21, one where unemployment topped 10% and deflation was as high as 18%! The bear market that accompanied that recession was also severe as the DJIA declined 46%. Imagine coming out of a pandemic with nothing more than an 11% correction and then getting socked with that!

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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