The Hunt for a Pandemic Repeat Is Already Starting

Though COVID-19 still dominates headlines, it seems some are now seeking new worries. So far, they seem to have found two: swine flu and, um, the Bubonic Plague. The former has circulated through Chinese hog farms for over a decade, occasionally infecting people. The latter turned up in a shepherd in Inner Mongolia. Don’t be shocked if either stays in the headlines for a while—or if other diseases hit the headlines with the words “pandemic potential,” which have accompanied most of the swine flu coverage. One regular feature of new bull markets is the near-universal tendency to fight the last war. Heightened awareness of every illness percolating in a corner of the world doesn’t mean a new disease is set to truncate this recovery.

For now, there is no evidence this strain of swine flu is circulating broadly among humans. As Bloomberg highlighted, research suggests it has infected “dozens” of people since 2016, and it is getting headlines now solely because of a research report noting that it has characteristics making it a pandemic “candidate.”^[i] That doesn’t mean it is likely to cause a pandemic, much less one on the scale that would inspire a mass global lockdown. The last swine flu pandemic, in 2009, didn’t. As for the plague, it is actually fairly normal for a handful of cases to turn up in rural areas each year, typically arising from human contact with infected wildlife. As The New York Times pointed out, even the US averages seven cases annually.^[ii] Additionally, while society’s view of the plague is shaped by history books’ depictions of the Black Death in the middle ages, in this day and age it is a highly treatable bacterial infection.

But we aren’t here to play armchair epidemiologist. Rather, we thought it worth highlighting how utterly typical this behavior among investors—seeking a repeat of the last bear market’s cause—is in early bull markets. As a general rule, investors spend much of a bull market on the lookout for a repeat of whatever caused the last bear market—a phenomenon called fighting the last war. In the bull market that ran from 2009 to 2020, investors were on perpetual alert for “the next Lehman Brothers” or “the next 2008.” Early on, many feared Alt-A mortgages were the second shoe set to send stocks far lower and kill off any recovery. Later, it led to mini freakouts and a litany of think pieces on distressed auto loans, student loans, collateralized loan obligations, leveraged loans, junk bonds, Energy sector bonds and Italian banks. None caused the next bear market. But all received heaps of scrutiny. In the 2002 – 2007 bull market, all eyeballs were on Technology stocks for any renewed signs of froth. That even lingered into the most recent bull market, with people parsing every uptick in IPO activity for hints of Dot-Com Bubble Version 2.0. But Tech euphoria didn’t cause the next bear market, either.

When the investment world gets laser focused on a certain issue, that issue generally loses its power. Surprises move markets, and as investors fight the last war, they drain its surprise potential. We see that happening now with diseases. It wasn’t the simple existence of the novel coronavirus that caused this year’s bear market—it was society’s response. It was the choice to shut down basically the entire developed world economy for several weeks, which forced markets to price in the sharpest economic contraction on record. No one expected that in February because it had never happened before. But now, with the memory still fresh—and the reality of lockdowns still being lived in several cities—it seems almost everyone expects it. We won’t go so far as to say a second mass global lockdown wouldn’t be a problem. It could be. But it would have to be something hugely major (repetition intended) to be worse than what people expect and pack a severe punch.

We are big history fans, and in our study of past bear markets, we have found that two bear markets rarely have the same cause. When everyone stays busy fighting the last war in a bull market, it creates an opening for some other negative to squeak through unnoticed. So while vigilance is always a good trait, being hyper vigilant for the next bearish pandemic probably won’t be the ticket for long-term investing success. Taking some time to look where others don’t—for opportunities as well as risks—will likely prove a more fruitful endeavor.