Conventional wisdom suggests that a flu pandemic like COVID-19 would have resulted in a further decline in financial markets rather than a reversal of a long established declining trend. That was not the case for the period from 1918 to 1920.
In the last worst case of a flu pandemic, known as the Spanish Flu from 1918 to 1920, we compare the movement of the Dow Jones Industrial Average (DJIA) to the Dow Jones Transportation Average (DJTA).
In the period when it was on the ascent (late 1917), the Spanish Flu had seen the Dow Jones Industrial Average come off of a decline of -40.09%. From the December 19, 1917 low, the Dow Jones Industrial Average increased approximately +81.37% by November 3, 1919.
The peak in the Spanish Flu occurred approximately November 1919. This was in the midst of the Dow Jones Industrial Average’s run from the low in December 1917 to the 1919 peak. After the 1919 peak in the Dow Jones Industrial Average, the market declined -46.57% to the August 25, 1921 low. The low in 1921 was the beginning of the monumental runs in the stock market with a market peak in 1929.
How many declines of -3% did the Dow Jones Industrial Average experience in the period from December 16, 1915 to December 16, 1921?
What conclusions can be drawn from the above data? In the period from 1918 to 1920, the Dow Jones Industrial Average experienced 6 declines greater than -3% on the way to the peak in November 1919. After the peak of November 1919, there were a total of 10 declines greater than -3% on the way to the August 1921 low.
Below we have broken the declines into a quarterly basis in the period from December 1915 to December 1921.
With half of the declines of greater than -3% occurring in the fourth quarter of the year, we should expect that there is going to be more large declines to come.