When it comes to investor sentiment, public health concerns like the Ebola virus tend to spark fear in financial markets. But it's important for investors to distinguish between short-term and long-term risks.
Last week saw the stock market shake off its fears and climb higher, that is, until the first confirmed case of Ebola in New York City was announced. Investors panicked and halted the rally that had been underway as Ebola-fueled volatility took hold again. However, investors relented on Friday and the market powered on to post the biggest weekly gain for the S&P 500 for 2014, helped by generally positive earnings reports.
What does Ebola mean for markets and investors? Well, we've been tracking the Ebola epidemic closely ever since the number of infected people surpassed those from previous bouts of Ebola over the summer.
Here are our four key takeaways:
- Fears of contagion appear overestimated. An infected person in a densely populated area like New York City creates fear but it's most likely unfounded. Ebola has a long incubation period but it's apparently not contagious until the symptoms surface. That gives officials time to track down people who may have been exposed to the virus, isolate and observe them. In addition, it gives officials time to treat the illness; the sooner the disease is treated, the better the chances that a patient survives.
- Contagious diseases come with globally integrated economies. We need to recognize that contagious diseases may just be part and parcel of having a global economy. And Ebola may be the first of many serious diseases that come to America. While watching public policy missteps is painful, these mistakes will lead to a better infrastructure.
- Biotech is poised to benefit. Ebola could be a catalyst for greater investment in biotechnology. A bipartisan team of senators, Orrin Hatch (R–Utah) and Elizabeth Warren (D–Mass.), are calling for a substantial increase in federal funding for biomedical research with the National Institute of Health and other organizations. Many biotech companies will benefit as well, and it could spur greater interest among institutions and individuals in the biotech industry.
- The “worst-case scenario” is very unlikely. The black swan scenario that could truly cause panic and impact commerce and travel is the Ebola virus going airborne. However, most experts say the chance of this happening is very remote. And studies suggest that when a virus becomes airborne, it typically becomes less potent.
Comparatively, consider the threat posed by SARS more than a decade ago. SARS, while far less lethal, was much more contagious because it was airborne. It created an enormous amount of fear, which led to less travel, particularly among tourists, and lower retail sales. Both the economy and the stock market took hits, but those setbacks were short-lived.
Lessons from SARS
The 2002 outbreak of SARS put pressure on stocks
but the volatility was short-lived.
In other words, Ebola is most likely to contribute to downside volatility, albeit short-term volatility. That's in addition to the volatility we expect in the US stock market due to the end of quantitative easing and confusion surrounding Fed policy. So expect more scary Ebola headlines and more volatility in general, but don't be scared away from exposure to stocks.
For their part, investors should stay the course and focus more on monetary policy, the euro zone, China and overall fundamentals. Those factors will have a bigger impact on stock-market moves.
However, investors should be sensitive to the potential for the “black swan” scenario, which could sink the economy and the stock market. In addition, long-term investors who are interested in greater growth potential may benefit from a small overweighting to the biotech industry.
Kristina Hooper, CFP, CAIA, CIMA, ChFC, is US head of investment and client strategies for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.
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AGI-2014-10-27-10902
