What did the US Stock market look like during the Spanish Flu?

Stock markets sold off heavily this week due to the fear of the impact of the Coronavirus pandemic on economies, as more and more people stay home, and supply chains are disrupted.

If we look at the S&P 500 over a 3-month period the drop is dramatic.

That's an 11.5% decline in just one week. Look at a chart over a longer period, puts the decline into context.

You can see the 5-year chart for the S&P 500 above. A sharp decline, but nothing too bad, and it could just be a correction. The coronavirus, and associated CODIV-19 disease, is still nothing like the Spanish Flu that infected 500 million people between January 1918 – December 1920 and killed 50 million or about 10% of patients. Hopefully, it won't get that bad, since the virus is highly infectious, there's a chance it gets out of control with millions infected, and the medical system unable to cope.

So I'd like to take us to the past to see how the market behaves during the Spanish flu. Market valuation matters over the long team, so let's check Shiller CAPE chart first.

WWI was still going in early 1918, and markets were already depressed with a CAPE of 6.64 in January 1918, which went all the way down to 4.78 in December 1920, the lowest ever. In the meantime, we are now at much more elevated levels with a CAPE of 30 equivalent to the one at the top of the roaring '20s. So if it does get out of control - which hopefully it won't - we should expect a much sharper drop.

I wanted to check the S&P 500 chart in 2018-2020, but since it was created in 1957, we'll revert to the much older Dow Jones.

That's a drop from 1470.47 points to 956.72 points, or around a 35% drop. It's probably not purely related to the Spanish Flu, and one would have to look at the history of the time, notably, the end of WWI in November 2018 which may help the jump to 1600+ points before the sharp drop.

One way to check the effect of the Spanish Flu is to see if we have a chart of cases, especially in the US since after all, we are looking at the Dow Jones here. Most info is shown on Wikipedia. The first chart is in the UK which shows three waves.

 

The worst happened in November 1918, and nothing is shown in 1920 at all, so there must have been few cases during that year.

The chart above also shows fatalities in big cities in the USA (New York), as well as in France, the UK, and Germany with all peaking in October-November 1918. If we look at the Dow Jones nothing much happened market-wise during that period, and an article on Seeking Alpha and the related chart shows it clearly.

Source: Seeking Alpha

As we've seen above, markets were already very cheap at the time, and the market situation today is much different with several stock markets clearly overvalued around the world, and globalization was not a thing in 1918-1920.