U.S. stocks during 1918 'Spanish flu'  

The Spanish flu, also known as the 1918 flu pandemic, was an unusually deadly influenza pandemic caused by the H1N1 influenza A virus. Lasting from February 1918 to April 1920, it infected 500 million people–about a third of the world's population at the time–in four successive waves. The death toll is typically estimated to have been somewhere between 17 million and 50 million, making it one of the deadliest pandemics in human history.

It was the First World War, but the U.S. stock market was not as bad as expected.

Photo: Bespoke Investment Group

Looking at how the Spanish flu outbreak played out, there were basically three different waves of the virus (red line). The first wave in the summer of 1918 was a relatively mild one compared to the other two, and the DJIA's performance during that wave was essentially flat as it never declined more than 3%. 

The Spanish flu's real damage was in the fall of 1918 when the mortality rate spiked up as high as 24 per 1,000 people per week. During that wave of the pandemic, which also came in the thick of a post-WWI recession, the DJIA peaked just as the wave was getting underway and fell for three months. Even with the severity of the outbreak during that wave, though, the DJIA never fell more than 11% from peak to trough. On a comparative basis, even after the 28% rally over the last four weeks, the S&P 500 is still down 15% from its high. Obviously, the DJIA never even approached anything close to a bear market.

Photo: Bespoke Investment Group

Looking at the chart, the DJIA's low of the decline coincided with the second wave of the outbreak just as the third (more mild) wave of the pandemic was getting underway. Furthermore, during that third wave, the DJIA kicked off what was a strong rally of more than 25% in less than three months on optimism over an end to the outbreak.

So, once the Spanish flu's mortality rate dropped down to zero, it must have been nothing but clear skies ahead for the Dow. When it comes to the stock market, there's always something. Less than a year after the mortality rate from the Spanish flu dropped down to zero, and the U.S. economy went into a year and a half long recession. That contraction was so severe that it had been dubbed the Depression of 1920/21, one where unemployment topped 10%, and deflation was as high as 18%. 

During the second wave of deadly influenza attacks in 1918, the decline in U.S. stocks reflected more market concerns about the end of the monetary expansion driven by the fiscal deficit after the war, rather than the despair that the epidemic brought to humankind.

U.S. stocks in COVID-19

The U.S. stock market performed exceptionally well during the COVID-19 period, and Dow Jones and Nasdaq kept hitting record highs.

The Nasdaq Composite Index, which represents U.S. technology stocks, has risen 54.3% from its low. The stock prices of Apple, Amazon, and Facebook have rebounded more than 70% from their lows at the time, Netflix has rebounded more than 60%, and Alphabet has rebounded more than 45%.

Since the outbreak of the COVID-19 epidemic, various online demands such as e-commerce, electronic games, and online office have increased. Most of the technology giants have exceeded expectations during the pandemic.

Also, with the spread of the COVID-19 pandemic in the United States, the Fed has implemented massive stimulus plans in 2020. Firstly, Federal Reserve cuts rates to zero and launches a massive quantitative easing program, so any investors chasing yields have to enter the stock market.

More recently, news of potential therapeutics and vaccines for the coronavirus has set the market surging as they're seen as indicative of hopes that the pandemic can be thwarted. Conversely, the market has tended to look through some awful developments on employment, retail sales, and corporate earnings.

Why the stock market is up amid chaos 

"There are many valid reasons to be bearish on risk assets like stocks or corporate debt just now, but history shows markets look through many sorts of tumultuous events and have done so for decades," said Nicholas Colas, co-founder of DataTrek Research. "That may seem counterintuitive, and perhaps not even 'fair,' but it's absolutely true."

One of the clearest examples comes from 1968.

The Rev. Martin Luther King and Robert F. Kennedy were both assassinated. North Vietnam launched the Tet Offensive, and the 1968 presidential election featured a highly divisive contest between Hubert Humphrey and Richard Nixon. Protests abounded around the nation and the world, featuring the memorable raised-fist salute from John Carlos and Tommie Smith at the summer Olympic games.

"1968 was the year that 'shattered America' and many tumultuous events and violence took place. And despite that, the equity markets managed to perform solidly," wrote Tom Lee, head of research at Fundstrat Global Advisors. "1968 is a reminder that stocks and world events are not always connected."

Any sign that the economy won't heal as quickly as the market is pricing, or that the geopolitical issues and social protests could be more destabilizing, could hurt a market that has been boosted by hopes for a quick turnaround fueled by policy accommodation on a scale never attempted before.