Don't sell. Market's sniffles are temporary

JOHN HEINZL

April 28, 2009

What makes outbreaks like swine flu so frightening are all the unknowns. How many people will it kill? Will health authorities be able to contain the virus before it gets out of control? How long before it runs its course?

Reading the headlines, it's easy to freak yourself out. But for all the unanswered questions about the virus itself, based on previous health scares including SARS, there are a couple of things we can say with a fair degree of certainty:

1) Any setback to the stock market will be temporary.

Even before reports of Mexican swine flu emerged, the stock market was looking for an excuse to give back some of the gains it's been racking up. While yesterday's 1.6-per-cent drop on the S&P/TSX hardly qualifies as a panic selloff, if the slide continues, investors sitting on cash may be able to turn the outbreak to their advantage, money managers say.

"I would use a good selloff as a buying opportunity," says Tony Demarin, president of BCV Asset Management in Winnipeg. "You definitely don't sell."

Dumping your stocks at the height of the 2003 severe acute respiratory syndrome (SARS) scare certainly would have been a mistake. As the accompanying charts shows, stocks plunged from mid-January to mid-March that year as the number of probable SARS cases rose. But as the number of cases peaked, stocks started roaring back.

It's worth noting that the stock market didn't wait for public health officials to issue an all-clear; it started rising well before then.

"Even though the [World Health Organization] only lifted the SARS alert in the summer of 2003, the market began to rally at around the time the number of probable cases began to fade," says Stéfane Marion, chief economist and strategist at National Bank Financial.

That said, Mr. Marion cautions that it's impossible to predict whether the swine flu outbreak will be more or less severe than SARS. Adding to the risks, the global economy is in a more precarious state today than it was in 2003, which makes it more vulnerable to a setback.

Some investors are fearing the worst, judging by the plunge in shares of airlines, cruise operators and hotels yesterday - companies that will be the first to feel the impact of a slump in travel.

Still, even in more severe health crises, the stock market has shown remarkable resilience. During the Spanish flu pandemic of 1918 to 1920, in which up to 100 million people died, the Dow Jones industrial average gained 83 per cent from its 1917 low to its late-1919 high, said John Johnston, chief strategist for Harbour Group at RBC Dominion Securities in Toronto.

The behaviour of stocks during both severe and mild outbreaks "tells you that any hit to the economy and any hit to the stock market is temporary in nature," he says. "My view is that the economy will hit bottom in November, and I think there's a chance now that [because of the swine flu outbreak] that it could be later, but I'm not inclined to change my forecast."

The good news is that, although the disease has been linked to more than 100 deaths in Mexico, elsewhere the cases have been much milder. What's more, because of SARS and the threat of avian flu, public health authorities are in a position to respond quickly to the current outbreak by administering anti-viral medications and ordering vaccines.

This health crisis will pass. Don't let it scare you into doing something you'll regret.

SARS: A temporary setback

Markets plunged when cases of severe acute respiratory syndrome were growing, but rebounded sharply as the number of new cases fell.

Per cent change during SARS

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