With the stock market still hovering near record highs, it doesn't take much for traders to get nervous. This explains some of the recent sharp selling sparked at least in part by anxiety over the spreading coronavirus within China and to other countries.

The roughly 1.5% tumble on Jan. 27 was the steepest down day for U.S. stocks in almost half a year. It coincided with news reports that companies from Disney and Starbucks to Ford and Apple were closing stores, suspending business travel or otherwise slowing or halting operations in affected areas of Wuhan, center of the outbreak, and other Chinese cities. Carriers such as British Airways have curtailed flights. The market lost more ground Jan. 31 amid rising health warnings.

The outbreak could remain in the news for months, if not longer, creating more market jitters.

The China angle is significant given the country's expanded trade ties and supply-chain connections with the U.S. and other Western nations. But while the headlines are worrisome, and societal health risks elevated, history suggests that the virus won't have a lasting influence on the investment backdrop.

Health outbreaks have pushed down stock prices before, but such scares don't exert a permanent impact. Long-term investors often are best served by not making rash moves, or any moves, based on these types of developments.

Study of prior health scares

J. Reed Murphy, chief investment officer at Calamos Wealth Management in Naperville, Illinois, looked at the market's reaction to 15 prior epidemics and pandemics dating to 1957, measured by performance of the Standard & Poor's 500 index including dividends. The health-scare list included flus, fevers, a smallpox outbreak, plague, Ebola, cholera and other viruses.

Two of the more recent and notable examples were a swine flu pandemic that lasted from early 2009 to late 2010, and the outbreak of SARS, or severe acute respiratory syndrome, in 2002 and 2003.

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Short-term, stock prices often did ease a bit as health outbreaks spread. In a few cases, they stumbled noticeably. The average one-month return for the U.S. market from the approximate start of an outbreak was negative 0.7%. But after three months, returns usually had turned positive again, and they kept improving after that.

On average, stock prices were up 9.9% roughly 12 months after an outbreak, in line with the historic yearly performance of the U.S. market.

Murphy's conclusion is that the stock market invariably recovers from the negative symptoms sparked by medical emergencies. "The health scares usually led to favorable performance within 12 months or so of an outbreak," he wrote in the research paper.

Global markets generally performed in line with U.S. stocks.

"It's important to highlight that the health of the global economy and health threats to global populations are not strongly correlated," he noted.

Will this time be different?

In fact, Murphy suggests that the impact of the coronavirus might be relatively muted compared with some prior outbreaks.

He credits Chinese authorities with responding quickly to curb travel and impose quarantines in affected areas. Also, Murphy said, medical services and personnel appear more sophisticated and prepared this time compared with, say, the SARS outbreak, which also began in China. Also, the country appears to be providing more information, and the heightened transparency helps to reduce uncertainty among investors and the general public, Murphy said in an interview.

"Mortality rates apparently are lower but it will take some time to play out," he said.

And while China's economy is larger than it was during past outbreaks centered in the country, Murphy said he didn't think the U.S. is especially vulnerable in terms of potential export losses, supply-chain disruptions or other business fallout.

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Grace Lau, a Phoenix investment adviser originally from Hong Kong who has visited China many times, also doesn't see investment risk as high. "I think the world has learned how to handle these contagious outbreaks better," she said.

Lau, a managing principal at Benefit Financial Services Group, expects the stock market to have a positive year in 2020, with limited impact from the virus for U.S. investors.

The bottom line is that health emergencies often are greatly overshadowed by other developments. For example, the SARS outbreak came during the bursting of and recovery from the tech-stock bubble, while the swine flu pandemic coincided with the market's bottoming and early rebound from the Great Recession.

Murphy's report noted the U.S. market tumbled 16.5% over the 12 months following the outbreak of a smallpox epidemic in India in 1974, marking the worst performance during any of the 15 health emergencies. But that event almost certainly had a negligible direct impact on U.S. stock prices, as global markets were much less interconnected back then and India's economy was more closed and state-controlled.

The more likely explanation for the market drop in 1974? The U.S. was in a recession at the time, triggered by a global oil crisis.

Long-term impact uncertain

The coronavirus scare is a good example of a type of investment threat that suddenly comes into focus even though it has been lingering for weeks if not months. Few investment forecasts for 2020 cited it as a prominent danger, even though the virus was identified as a concern in December by the Centers for Disease Control.

For example, a Charles Schwab report in early January didn't cite the coronavirus, or any other health dangers, among its top 10 stock-market risks for 2020. Rather, the list was topped by a possible return of inflation, trade tensions, corporate-earnings uncertainty and other issues that have been out there for a while — and which likely will continue to exert the greatest impact on stock prices.

Still, the report included an insightful warning: "Whether or not these particular surprises come to pass, a new year almost always brings surprises of one form or another. Having a well-balanced, diversified portfolio and being prepared with a plan in the event of an unexpected outcome are key to successful investing."

Reach Wiles at russ.wiles@arizonarepublic.com or 602-444-8616.