How Will the U.S. Swine Flu Outbreak Affect the Stock Market and ETFs?

by on April 26, 2009 | Updated May 14, 2009 | ETFs Mentioned:

Obama administration officials have today announced that students at a New York City high school were sickened by the same strain of swine flu that has killed people in Mexico, adding to fears in the U.S. after cases in Texas, California, and Kansas. There are now 20 confirmed cases of the deadly flu in five states. Meanwhile, the World Health Organization yesterday declared the outbreak of the virus “a public health emergency of international concern”. No, you’re not being morbid if you’re wondering: how will this affect the markets this week?

http://en.wikipedia.org/wiki/Swine_fluIn times like these, it’s good to look at comparable situations in the recent past, which this article from the Daily Telegraph does:

During the panic about Asian bird flu in 2005 and 2006, airline, hotel groups, insurers, and oil companies stocks fell heavily, while shares in drug, healthcare, and cleaning product businesses soared.

“I think there will be little bit of a lift for pharmaceuticals, but this may not follow through unless the situation gets out of hand,” said Paul Kavanagh of stockbroker Killik & Co.

To be clear, at this point, there’s a lot of uncertainty around the swine flu situation. Uncertainty however has proven to be a big market mover in the past year. Further, even the slightest new information about such a potentially explosive issue could have a significant effect on the markets. Here are some possibilities in the short term.

Sectors That Could Be Hit Hard

  • Transportation sector: Travel advisories and recommendations to stay home won’t help transportation stocks; ETFs like IYT.
  • Energy: Fewer people flying and traveling in general could cause weaker overall demand for energy and crude oil funds; ETFs like USO.
  • Equities in general: As we’ve seen in the past six months, a little bit of uncertainty can go a long way towards causing equities to tank; ETFs that index equities such as SPY and VTI.

Sectors That Could Get a Lift

  • Pharma and Healthcare sectors: In anticipation of demand for vaccines and health services, shares of pharmaceutical and healthcare companies could appreciate; ETFs like IRY and IHE.
  • Gold and Commodities: In the last year precious metal ETFs have been popular buys on days when panic seemed to set in; ETFs like GLD and SLV.
  • Treasuries: Similarly, a flight to safety away from equities could make for inflows in bond funds thought to be very secure; ETFs like IEF and TIP.

Again, these are just some of the possible short-term effects we could see resulting from the swine flu epidemic news. The swine flu coverage will be in the media simultaneously with other economic announcements, so it’s anyone’s guess where things will end up. Further, it’s worth remembering that at this point, even the authorities have limited information on and predictive power over the swine flu situation; as the situation changes and becomes more or less clear, the markets will continue to absorb the information. Either way, it will be interesting to see the movement this week.

Disclosure: At the date of publishing, the author currently owns shares of ETFs mentioned in this article: TIP and VTI.