A Pandemic of Fear

In 1918, a few cases of the flu meandered out of a Kansas army camp, ended a war, paralyzed commerce, and slaughtered tens of millions. Maybe 100 million. Likely more.

John M. Barry, in his book The Great Influenza, posits the so-named Spanish Flu might have killed 10% of the world's population. Hard to know precisely because records were spotty even in developed nations, particularly at the apex of the pandemic, when doctors and nurses simply lay down next to their patients to die themselves. Municipalities stopped record keeping. Anyone fortunate enough to avoid sickness didn't dare report for work.

No one was spared. A medical team sent to remote Arctic outposts found entire villages decimated. Pacific islands, separated by hundreds of miles of oceans, were hit particularly hard, as were parts of Africa—folks in isolated communities lacked the antibodies that protected, somewhat, those in Europe and America.

Most alarming, the flu was deadliest to healthy adults. A healthy man in his mid-twenties might have shown no symptoms in the morning and been dead before evening. Some of those afflicted turned black before dying, eerily reminiscent of the Plague—Black Death. The world was paralyzed with fear. City streets were empty. Meetings of any kind were cancelled. People wore masks if they had to leave their homes and wouldn't speak to others in the faint hope of preventing the disease from spreading.

The Spanish Flu was an avian flu that mutated to an efficient killing machine. Bird flues are particularly deadly—a fresh mutation ensures humans lack antibodies to squelch the virus. Meanwhile, the H5N1 avian virus has been percolating in Asia, stoking fresh fears of not only the human toll, but of global market devastation. After all, that's what happened back then.

Except, the market was up over 25% in 1918. It was up 21% the following year.

Past performance is no guarantee of future returns. Everyone knows that—at least most people, with the exception of particularly militant momentum investors. Voodoo practitioners aside, everyone agrees you can't make market bets based on historical patterns. So why our obsession with history? History can teach us if something is reasonable to expect. Will humanity face another flu pandemic? Probably. Will it take the market down. Probably not—it didn't before. Something else might, but not the flu. As much as 10% of the world dead—not sick—dead. Yet the market rolled on.

This trick works for any concern guaranteed to tank the market. "Higher oil prices drive down stock prices!" Really? Have they before? Check history—it's not the case. "Middle East tensions will roil markets!" Interesting. Is it more tense now than when Iranian students stormed our embassy and held 52 hostages for 444 days? The market was up 18% in 1979 and 32% in 1980. "Global warming will be the death of us all!" Oh-oh. Yet, the Vikings made a pretty prosperous go of it when they farmed Greenland during the Medieval Warm Period.

Talking heads deliver economic news with an authoritative cause-effect. Higher interest rates will slow the economy. Tax cuts will increase our budget deficit, which will hamper growth. Trade deficits do cause a weak dollar. Higher housing prices will tank the market.

But why? Because a bunch of people say so? When faced with hysteria-inducing headlines, look for similar occurrences in the past. Have fed fund rates raises always stymied the market? Have tax cuts always led to armies of unemployed paupers begging in the street? You might find the economic and market outcome has been random to the alleged cause. Or, the outcome might have been the opposite of what pundits preach.

Does this mean, should the dreaded Bird Flu ever mutate into a global killer, it's time to go double long? Not necessarily (sickos). But global pandemics don't automatically spell doom for markets. History teaches us.