Brandon Inman lives and works in Shekou, China where he has a ground-level view of the Coronavirus’ impact. Plenty of businesses and schools are closed. Some Chinese cities look like ghost towns. Local authorities say it’s OK to go outside. But the virus spreads easily among large groups, so plenty of people spend much of their day at home. If they want to go to a restaurant, most are ordering take-out food to avoid contagion with the virus.

Fortunately, many reports suggest the virus is being contained. But the business impact could be huge. That’s what Brandon Inman fears. He’s worried how the virus could affect his retirement portfolio if the stock market crashes.

Carolyn Jeziorski is a lot less concerned. Originally from Elmira, New York, she now lives and works in Guangzhou, China. She has seen outbreaks before. That’s why she says she doesn’t panic, especially when it comes to her investments. “I was in Nigeria when the Ebola virus spread and I was in Egypt when the H1N1 virus broke out, so I’m not getting too concerned about the Coronavirus,” she says.

It’s tough to know, for sure, whether the Coronavirus will cause stocks to drop. But here’s what we know. When the public fears stocks will crash, based on some kind of world event, stocks almost never fall. Instead, stocks fall when almost nobody expects it.

Jeremy Siegel, a professor of business at University of Pennsylvania’s Wharton School, says most of the time, there’s no rhyme or reason for big stock market rises or falls. He looked back at the biggest stock market moves since 1885 (focusing on trading sessions where the markets moved by 5 percent or more in a single day). He tried to connect each of them to a world event.

But most of the time, he couldn’t find a connection.

For many people, this hardly makes sense. We like to believe that we (or at the very least, ‘the experts’) can predict stock market movements based on economic events. But trying to forecast the market’s direction is like trying to catch a fly with tweezers.

Assume the Coronavirus caused more Chinese businesses to close. Assume flights to China continued to be postponed. Assume factory employees couldn’t work for a month. Many of those workers make parts for American-sold goods. Assume American businesses in China, such as Starbucks, were closed for a solid month. The knock-on effect might cause a recession in China and in the United States.

There are several “ifs” here, but let’s assume this happened. If a recession were on its way, should you sell stocks? History says you shouldn’t. More often than not, stocks rise during recessions.

No, this doesn’t make sense. We might like to think we can buy on good news and sell when things look bleak. But the markets don’t cooperate with that line of thought. Randomness rules instead.

Consider unemployment rates. If a working crystal ball could reveal when masses of people would be out of work, would you sell your investments before unemployment hit a peak? In his book, Markets Never Forget , Ken Fisher shows we shouldn’t. Historically, stocks have soared when unemployment figures get close to hitting new heights. This doesn’t mean investors should wait for soup kitchen lineups before they invest. And it might look like a pattern that will guide us in the future. But randomness rules instead.

High Unemployment and S&P 500 Returns

Six Months Before Unemployment Peaks S&P 500 Returns In The Following 12 Months
November 30, 1932 +57.7%
December 31, 1937 +33.2%
July 30, 1946 -3.4%
April 30, 1949 +31.3%
March 31, 1954 +42.3%
January 31, 1958 +37.9%
November 30, 1960 +32.3%
February 26, 1971 +13.6%
November 29, 1974 +36.2%
January 31, 1980 +19.5%
June 30, 1982 +61.2%
December 31, 1991 +7.6%
December 31, 2002 +28.7%
April 30, 2009 +38.8%
Average +31.2%

This is mind-bending stuff…and there’s so much more. If you could see that the Coronavirus would cause Chinese or U.S. GDP (gross domestic product) to slow, would you want to sell stocks then? Once again, randomness might smile.

It makes sense that economic growth and stock market growth are somehow connected. But they aren’t as connected as most people think. For example, the U.S. economy’s GDP growth averaged 3.47 percent per year from 1965-1982. Historically, that’s a strong growth rate. But over that same time period, U.S. stocks were anemic. They beat inflation by just 0.5 percent per year.

In contrast, the U.S. economy recorded relatively low GDP growth from 2009-2019. It averaged just 1.83 percent per year. But over that time period, U.S. stocks beat inflation by a compound annual average of 13.14 percent.

U.S. Economic Growth and Stock Market Growth Aren’t Strongly Correlated

Average Annual GDP Growth Average Annual Stock Market Growth Before Inflation Average Annual Stock Market Growth After Inflation
1965-1982 3.47% +7.0% +0.5%
1982-2000 3.44% +18.50% +14.73%
2009-2019 1.83% +15.18% +13.14%

China’s economic growth and its stock returns are even less correlated. China’s GDP increased by a whopping 7.7 percent annually over the 10-year period ending 2019. Few countries matched that rate. But despite such rapid economic growth, the Chinese stock market was among the world’s worst performers. The iShares China Large Cap ETF (FXI) averaged a 10-year compound annual return of just 2.71 percent.

Forecasting stocks based on economic events isn’t just tough in theory. In 2008, a financial firm bet Warren Buffett that it could pick hedge funds that would beat the S&P 500 over the following ten years. The firm selected its contenders based on a belief that these handpicked managers could forecast the market. But they couldn’t predict the market’s purge in 2008, so Buffett won that bet. The S&P 500 trounced those hedge fund managers. As I explained here, even if the hedge fund managers had worked for free, a globally diversified portfolio of stock and bond market index funds would have still made them look silly.

This brings us back to the Coronavirus and Carolyn Jeziorski. She won’t alter her portfolio based on fear of the epidemic. As seen in the table below, epidemics don’t reveal how stocks will perform. Predicting stock market movements is a hazardous game. Those who get lucky once will walk back into the casino. That’s why the famous investor, Peter Lynch, says, “Nobody has been right [about market forecasting] twice in a row.” It’s why Warren Buffett says, “Stock market forecasters exist to make fortune tellers look good.”

Instead of trying to catch a fly with tweezers, investors should maintain a diversified portfolio of low-cost index funds. They should add money every month, maintain their goal allocation (rebalancing if needed) and never, ever, get sucked into speculating.

Epidemics And Stock Market Drops Aren’t Strongly Correlated

Epidemic Month end 6-month % change of S&P 500 12-month % change of S&P 500
HIV/AIDS June 1981 -0.3 -16.5
Pneumonic plague September 1994 8.2 26.3
SARS April 2003 14.59 20.76
Avian flu June 2006 11.66 18.36
Dengue Fever September 2006 6.36 14.29
Swine flu April 2009 18.72 35.96
Cholera November 2010 13.95 5.63
MERS May 2013 10.74 17.96
Ebola March 2014 5.34 10.44
Measles/Rubeola December 2014 0.20 -0.73
Zika January 2016 12.03 17.45

Further Related Reading

Andrew Hallam is a Digital Nomad. He’s the author of the bestseller Millionaire Teacher and Millionaire Expat: How To Build Wealth Living Overseas