So one thing to remember is that we don’t have that many historical opportunities to study, as we try to answer this question. Incidents include SARS, Ebola, Zika, and bird flu. Each of these produced a temporary decline in stocks and a rise in bonds, which six months later was generally reversed – excepting Ebola, which fell during a period of globally slow economic activity spurred by a steep decline in oil prices. Because the economic situations were all different when these epidemics struck – SARS for instance came after the tech bubble burst during a recession – and because the Chinese economy is much larger now than at the time of its last epidemic, results this time around might be different. Today, we have stocks near all time highs and decent if not spectacular growth.
Still, at least we have some data points. And these show that the market does tend to improve sometime after the WHO declares an epidemic, and that stocks do tend to recover by about six months after their first declines.
Bonds, on the other hand, tend to rise in value, and interest rates to fall, as investors gauge the economic impact of the epidemic. In this case, the virus emerged during China’s Lunar holiday, a time when economic activity tends to be suppressed anyway. But there is no denying that Starbucks closing half its stores in China, airlines ceasing flights, Disney closing Disneyland in Hong Kong and so forth is going to have an impact on growth. Bond investors view this as a positive for rates – in fact we may see another round of interest rate reductions worldwide by central bankers.
In short, epidemics tend to produce negative, temporary impacts for stocks and positive temporary impacts for bonds, buttressing the idea that a diversified portfolio that owns both bonds and stocks is usually appropriate for even aggressive investors.