Markets Shake off Flu Bug

By Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, May 3, 2009

NEW YORK -- Health jitters over the swine flu deepened last week as the virus spread rapidly across the globe. But after a brief, flu-inspired stumble, the nascent stock market rally has survived, prompting some analysts to tout its resilience despite fears of a pandemic, lingering worries about the banking industry and implications of a Chrysler bankruptcy.

On Monday, worries of a possible pandemic rattled markets. Airline stocks plunged. So did pork futures. Oil and the Mexican peso took a hit.

But by the end of the week, the peso had recovered slightly and oil prices had climbed to five-week highs. Many of the hammered U.S. stocks -- Starwood Hotels and cruise operator Carnival, for example -- had recovered at least some of their losses. At the same time, big pharmaceutical companies and small biotech firms gave back some of their gains.

Alan Skrainka, chief market strategist for Edward Jones, said investors may have reacted more negatively to news of the swine flu had it struck several months earlier, when fears of a deep recession were already driving investors to unload stocks. But the fact that investors didn't flee, he said, underscored their growing confidence that the worst is past.

"It's another element of uncertainty we didn't need," Skrainka said. "But it's not something that is going to derail the progress we've made."

Indeed, by mid-week, traders who had driven up pharmaceutical stocks were writing off the swine flu as an old story, although many questions remain about the disease and its impact on the economy. On Wednesday, the World Health Organization declared an imminent pandemic. As of Friday evening, it reported that the disease had spread to 13 countries.

"Traders are a fickle bunch. And they go with the flow of the day, the story of the day," said Joe Saluzzi, co-founder and co-head of equity trading at Themis Trading in New Jersey. "Anytime you surprise the markets, they get nervous. They ask questions later and they shoot first. . . . I think this thing will be short-lived."

News that existing antiviral drugs appeared to be effective against the disease helped calm markets, as did memories of the recovery from the outbreak of severe acute respiratory syndrome in 2003, investment strategists added. Asian markets and their economies took a hit in 2003 when the SARS killed hundreds and shut down tourism in the region. But once the disease was contained and travel bans were lifted, the region quickly recovered.

The WHO had documented 367 cases of swine flu as of Friday night, most of which are in Mexico and the United States. Ten deaths had been reported. In comparison, there were 8,000 cases of SARS and some 800 deaths over an eight-month span. According to the Asian Development Bank, SARS caused the region a loss of about 0.6 percentage points from the economic growth rate in 2003.

"Most of the economic damage from these pandemics come not from the direct impact of the disease itself but from panicked measures that might be taken, like wholesale travel bans and people changing their behavior in ways they don't really need to," said Julian Jessop, chief international economist at Capital Economics in London. "If we look at SARS . . . if you step back a bit, in most of the countries concerned, it was only a blip in the data."

Several market strategists noted that the United States is less dependent on trade than the countries affected by SARS, including Hong Kong and Singapore.

Still, other markets experts called for caution. SARS occurred in much better economic times, they noted, and affluent Asian countries were able to spur quick recovery by implementing expansionary policies, they said.

"It is no secret that policies around the world are already extremely overextended," said Christian Broda, senior international economist at Barclays Capital. "Boosting policy as a response to this might be harder to do in this environment than it was in the past."

"It's still a very much up in the air what this can truly be," Broda said of swine flu. The economic impact, he said, is directly linked to the strength of the virus. "It might dissipate faster than SARS . . . but it could also become stronger and have much more of an economic impact. Uncertainty is the name of the game here."

© 2009 The Washington Post Company