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Portfolio > Economy & Markets

Kleintop: Does Zika Pose an Olympic-Sized Risk to Stocks?

By Emily Zulz

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Individuals traveling to the Olympic Games should take precautions against Zika, but do investors need to inoculate their portfolios?

“Of the 500,000 people expected to be visiting Rio de Janeiro for the 2016 Summer Olympics some may become infected with Brazil’s Zika virus and establish new outbreaks upon their return home,” Jeffrey Kleintop, chief global investment strategist at Charles Schwab, writes in his latest commentary.

Kleintop says it’s easy to imagine a nightmare scenario for any such event.

“The emergence of a lethal and rapidly spreading pandemic could lead to terrible human suffering and bring about far-reaching negative economic and market consequences,” he writes.

To determine the potential impact of Zika today on the economy and markets, Kleintop examines past world pandemics and their economic effect. What he finds is that these past pandemics have not had a significant effect on the economy.

“History shows us that the impact on the economy and markets has not been significant — even when the global economy was especially vulnerable to a shock,” Kleintop writes.

In particular, Kleintop looks at three relatively recent periods where the world’s economy and markets were especially vulnerable to a shock from a viral epidemic: 2003’s severe acute respiratory syndrome (SARS) outbreak, 2006’s avian flu (H5N1) and the 2009 swine flu (H1N1) epidemic.

In early 2003, the global economy was emerging from recession and wary of the invasion of Iraq. Despite this vulnerability, SARS “only briefly” added to the pressures on global stock markets, according to Kleintop.

Kleintop says the impact was felt most acutely in Asia, where the outbreak was most concentrated, and in airlines as travel declined.

The World Bank estimated SARS reduced global GDP by $33 billion.

“That may seem like a lot, but for perspective the seasonal flu costs an annual $7 billion in lost output just in the United States, according to the Department of Health and Human Services,” Kleintop writes.

Then, in June 2006, the avian flu (H5N1) garnered much attention. And while it was gaining attention, the Federal Reserve was hiking rates for the 17th meeting in a row.

“Polls at the time found that one-third to one-half of respondents were at least somewhat concerned about an avian flu outbreak in the United States,” Kleintop writes. “The World Health Organization confirmed that avian flu was spread directly between members of an Indonesian family, the first known case of human-to-human transmission of the lethal virus.”

However, the threat level was never raised to a pandemic since only limited human-to-human transmission had taken place, Kleintop writes.

Concerns soon faded, and Kleintop concludes that the avian flu only had a small measurable effect on the markets.

Three years later, in April 2009, the U.S. Centers for Disease Control and Prevention announced that the swine flu (H1N1) that spread from its apparent origin in Mexico to the United States could not be contained. Then the World Health Organization indicated this new strain of flu had the potential to become a pandemic, and the Obama administration declared a public health emergency.

However, Kleintop finds that markets failed to react to this news and the potential shock it could have had on the “fragile global economy” that was just beginning to recover from the financial crisis.

“While there is always the chance that the next outbreak could have greater consequences, it appears that the global economy and markets have been relatively immune to the effects of past epidemics,” Kleintop writes. “Individuals traveling to the Olympic Games may be wise to take some precautions against Zika, but investors may have little need to take action in their portfolios.”

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