“History doesn’t repeat itself, but it often rhymes.” – Mark Twain

As the S&P 500 closed at a record high on February 19th, the markets appeared unfazed by the growing national and global anxieties around coronavirus, the aftermath of Brexit, a US presidential campaign, and other geopolitical issues. However, just nine days later, an unsettling reality set in. The S&P 500 suffered its fastest-ever 10% decline and the Dow Jones Industrial Average had its worst week since the start of the 2008 financial crisis.

Concerns over the coronavirus, scientifically named COVID-19, have been lingering as the impact around the world has grown during the past month. Still, last week’s drops in the U.S. and global markets took many by surprise. The magnitude and volatility were driven by a variety of factors such as the virus spreading outside of China and concerns over the effect on global supply chains.

The depth of the fallout from the coronavirus is currently unknown and we won’t know the totality until the crisis has passed. However, history can serve as an important guide to gauge the ultimate impact of health epidemics on the global economy.

Historical Perspective Provides a Roadmap

The quick spread of the coronavirus has been alarming and has gathered a substantial amount of media attention. And the recent reaction is exactly what you would expect when investors start doubting the strength of the economy. Historically, there have been a number of infectious disease outbreaks including SARS, H1N1, Ebola, and Zika. While every virus outbreak is different, looking back at the other major epidemics over the past three decades, we can see that the impact to the U.S. and global economies and market tends to be short-lived.

In their analysis of 13 outbreaks since 1981, Charles Schwab found the MSCI World Index returned an average of 0.8% over a one-month period following an outbreak and 7.1% over a six-month period. In other words, even when the markets have taken a short-term hit from disease-related worries, they have tended to bounce back in the following months.

Like coronavirus, SARS (Severe Acute Respiratory Syndrome) originated in China and is perhaps the most relevant example to judge the potential impact of the latest virus. When SARS hit in 2003, more than 8,000 people worldwide were infected, and it claimed nearly 800 lives. The fears around the outbreak were real and markets mirrored those fears—the SARS epidemic cost the world economy a total of about $40 billion. However, as the disease became contained, the economy ultimately recovered. The S&P 500 posted a gain of 14.59% six months after the first occurrence and was up 20.76% 12 months later.

More recently, in 2016, the Zika virus—transmitted through mosquito bites and linked to birth defects in the babies of mothers infected while pregnant—impacted Latin America, the US, and the Caribbean. The global stock market dropped 6% a month after the outbreak, however six months later it was down just 0.6%. Similarly, the S&P 500 gained 12.03% six months after the initial Zika outbreak and eventually was up 17.45% in the 12 months following. Typically, the economic cost of an epidemic is due more to the panic associated with it rather than the virus itself.

While the coronavirus has surpassed the number of cases and deaths associated with SARS, the policy response has also been more aggressive. Additionally, it has yet to reach the levels associated with pandemics, such as the 1968 Hong Kong Flu that claimed around 1 million lives. The long-term economic impact of coronavirus will be determined largely by the world’s containment measures and the ability of policymakers to soothe the public’s concerns.

How Investors Can Respond

Pullbacks and corrections are a normal occurrence for an ongoing bull market. The general definition of a market correction is a market decline of 10% or more in the price from its most recent peak. It’s called a correction because, historically, the drop often “corrects” and returns prices to their longer-term trend. In the past 20 years, there have been 10 corrections in the S&P 500, with the most recent correction having occurred from September 2018 to December 2018. A drop and recovery are part of the normal ebbs and flows and history has shown that the market is capable of making it through such corrections.

As the crisis plays out, investors may feel the urge to sell in response to the coronavirus-related market actions. However, in the long-term, markets tend to rebound from such declines. Investors should continue to follow their long-term financial and investment goals, rebalancing where appropriate. Such planning helps navigate periods of higher than expected volatility, allowing for the confidence and ability to ride through market peaks and valleys.

At this point, it is difficult to know how severe coronavirus will be before it’s contained. As we look at the data and read the latest news, we should recall previous such events, like the market drop in 2018 and the subsequent recovery. We should recall the SARS pullback and the subsequent recovery. Pullbacks are normal, even ones that are big and fast.

As Mark Twain is often reputed to have said, “we have seen the rhymes many times before.” Over time, the fundamentals reassert themselves and growth resumes.