In a recent article for The Wall Street Journal, columnist Mark Hulbert argues that leaning on history to predict the effect the current pandemic will have on the markets could be a futile exercise.
Hulbert writes that while many have focused on the 1918-20 Spanish flue pandemic for clues, the current health crisis is “writing its own playbook.” He explains that several economists have noted that “the similarities that were initially identified have turned out to be misleading.”
Although the markets seem to have bounced back since the initial coronavirus-related dip in March, “careful analysis of the two periods shows that economic uncertainty has been far higher during the current pandemic than it ever was then.”
Hulbert contends that we must look to other, less deadly periods than the Spanish flu pandemic, that were characterized by higher levels of uncertainty.
Even though stocks recovered during both pandemics, the recent dip was much deeper than the one related to the Spanish flu, the article notes, citing comments from Stanford economics professor Nicholas Bloom. He explains that this is because of the more aggressive and widespread policies used this time around to contain the virus: “People in 1918 were told to wear masks, but there weren’t lockdowns.” Lockdowns, Hulbert writes, have led to an “extraordinary increase in the uncertainty that businesses are facing.”
The article also cites comments from MIT finance professor Andrew Lo, who agrees that analogies to the Spanish flu pandemic are misleading.
Professor Bloom and a group of his colleagues analyzed how the economy behaved during other periods of uncertainty, including after the 1987 stock market crash and the terrorist attack of September 11, 2001. They then created a forecasting model to predict economic outcomes, which proved to be fairly accurate regarding the 2008 financial crisis. Unfortunately, however, Bloom says the model does not forecast “a significant continuation of the economic recovery that has taken place over the past couple of months.” The current level of uncertainty, they say, “depends on unpredictable factors such as when an effective vaccine becomes available.”
The Stanford team’s analysis concluded that the stock market has “gotten too far ahead of the economy and must remain in a trading range or fall back until the economy has the chance the catch up.” While Professor Lo agrees, he expressed optimism that the economy will close the gap. That said, Lo acknowledges the risks: “We could still screw it up. For example, a contested election could cause huge and lasting damage. Leadership is crucial to this bright future. Lack of leadership can be disastrous.”