Source: National Museum of Health and Medicine

The markets have caught up to the hype of the coronavirus and dropped by over 10% in the last week. This is the worst 4 day route since the crisis and looks set to drop further as of Friday morning. The drop is being precipitated by the uncertainty as to how the outbreak will unfold. A number of commentators have reached out to epidemiologists and disease specialists to explain how this may play out. Their message has been increasingly similar and was echoed by the CDC when they told the public to prepare: that this could be bad as it is very likely at this point to spread far and wide. I trust the CDC’s word over any politician any day. It’s a body made up of mostly researchers and doctors and literally has Disease Control in its name. They study and prepare for these types of events so if they are saying to get ready, then we’d better get ready.

In researching how the markets and politicians have reacted in the past, I came across some older publications which discussed the Spanish flu of 1918, which was estimated to have killed around 50 million people globally. The more I read about it, the more I came to realize there are some eery similarities with the way that virus took its course on the population and what is happening with the coronavirus outbreak now. That may be scary since so many people died but it also tells us how things may play out so we can be prepared and avoid the virus taking such a toll this time. For this reason, I would like to present some of the information I came across which is similar and the ways in which this could play out different due to technology, information and the science which we have at our disposal.

The Similarities of Spanish Flu to Coronavirus

1. The Mortality Rate – One of the things that made the Spanish flu so deadly was the higher rate of mortality compared to flu outbreaks in the years leading up to 1918. At that time, just like now, the flu mortality rate was around 0.5%. It is estimated that the mortality rate for the Spanish flu was around 2-3%. This is about the same figure we are seeing for the coronavirus although it is still early in the game. The mortality rate in terms of the deaths per 1000 people through 1918 to 1919 can be seen below. You can see that at its peak outbreak, the mortality rate reached about 25 people per 1000 or about 2.5%.Source: CDC
2. International Travel Hastened the Spread – China’s efforts to contain the virus once it had a hold on how serious it was, were valiant but seemed to have not been enough to prevent it from jumping to other countries. Whether this is the fault of China or the mismanaged response of other governments will be a question to take on down the road but it seems that due to widespread travel, the virus is taking hold all over the world. Given that this virus spreads similar to the flu in which fluid droplets from sneezing or coughing land on surfaces which are then are touched by others, it will be very difficult to stop it once it has reached a country. Just one sneeze can release half a million virus particles to the area around someone infected. In the case of the Spanish flu, soldiers returning from World War I spread the virus from Europe. Despite much lower levels of international travel, the Spanish flu managed to infect one third of the world population within 18 months. It was seen from the Arctic to remote Pacific islands, so it is likely that today the coronavirus will do the same and spread to the far reaches of the world.

What May be to Come

1. Poor Countries Will Suffer More – It’s sad to say but the Spanish flu disproportionally affected poorer countries. The death rates across countries during that epidemic varied widely. In the US, about 675,000 people died, or about 0.48% to 0.64% of the population at the time, while in Iran (which is ironically dealing with a bad outbreak now) it is estimated that an astounding 8-20% of the population died from the flu. Rich countries have the resources to mobilize for both treatment and prevention which seems to go a long way in keeping the mortality rate of outbreaks down.
2. It May Come in Waves and Not be Confined to Winter – What was interesting about the Spanish flu is that there was an initial uptick in summer of 1918 and then there was a second wave that was much more deadly and severe which peaked in November of 1918. A third and final wave happened again in 1919 which peaked in March of that year. If you believe the Chinese numbers, which seemingly have peaked, the second wave would seem to be those cases outside of China, of which there are now more than in China.
3. Markets Also Fell and Then Recovered – Adding to the angst has been that the markets have seen a rapid fall of over 10% in the US in the last week. In 1918, there was a fall of about 10% as well but it was much slower to develop and started to recover even before the third wave of 1919 emerged. There are some rationale explanations for this besides the fact that information moved more slowly in 1918. The first being that war time censors were tightly controlling information and wanted to keep the public from being alarmed. That’s one reason it was named the Spanish flu. As it spread to Spain, since the country was not involved in the war and the press was much freer at the time, the coverage was much more intense so it was assumed by people in other countries it originated there. The other reason markets may have fallen more quickly this time could have to do with electronic trading reading the trends and incorporating profit warnings which may have reached a critical mass sending the market into a free fall. We have seen this play out in the flash crash when things were going right. When things are going wrong, AI and computers can bake in crises extremely quickly and help to move entire markets lower to adjust to the uncertainty. Below we can see an overlay of the mortality rate of the 1918 virus imposed over the Dow Jones Index for the same period, you can see that eventually the market recovered and soon hit new highs, although this also timed with the end of the war, so uncertainty fell dramatically after 1919.Source: Seeking Alpha

What is Different This Time

Its not all doom and gloom, there are reasons to be optimistic this time around. In addition, there were some particular characteristics of the Spanish flu that seem to differ from the Coronavirus, which are important.

1. More Knowledge – We have years of research and public bodies which are dedicated to fighting the virus. In addition, the general education level and knowledge of the public is much higher than it was in 1918. This is cause for optimism as basic knowledge about how the virus is transmitted will lead people to improve their sanitary habits and do away with customs that spread the virus. This includes washing hands frequently, being mindful of touching things like elevator buttons and avoiding touching your face.
2. Better Medicine to Fight It – In 1918 there were no antiviral drugs and no antibiotics. Doctors often initially misdiagnosed the Spanish flu which could have contributed to it spreading further. The remedies were limited to quarantine and cancelling public gatherings to slow or prevent the spread. City residents were advised to avoid crowds and court cases were held outside in the belief that gatherings indoors would hasten the spread. Even though there is no vaccine or cure yet for coronavirus, research is already underway and the knowledge is there for a potential breakthrough, the question is whether it will come in time for the world.
3. The Spanish Flu Affected Young Adults More – Due to previous strains of flu that had affected both older and younger people at the time, those in the 20 to 40 age range missed out on antibodies that other generations had developed. This contributed to a “W” shaped mortality rate by age for the Spanish flu, you can read more about why that is here. For coronavirus, the data is still sparse and provided by a government known to hide the truth, but if you believe the initial reports on mortality coming in from China, the virus seems to be taking a toll more on the elderly not the young and healthy.Source: CDCSource: China Center for Disease Control and Business Insider

So What Now?

As of right now, all we can do is wait and prepare. The authorities are already trying to change their tone to decrease the fear level but the fact remains that this virus will likely spread and infect a large proportion of the global population as a pandemic. The key now will be to adjust travel and behavior to prevent the spread as much as possible.

In the meantime the reactions of fear and panic will also create opportunities in the financial markets. Cool heads will prevail, so keep your hand sanitize on deck and get ready to invest, this won’t be the end of the world and we will live to fight another day.

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