The Swine Flu and the Stock Market: 5 Things to Know

Irrational fears and industries that could benefit and suffer.

A package of Tamiflu is seen in a pharmacy April 27, 2009 in the Queens borough of New York City. Demand for the anti-viral medicine Tamiflu has spiked following reported cases of swine flu in many parts of the world.

Demand for the anti-viral medicine Tamiflu has spiked following reported cases of swine flu in many parts of the world.

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Swine flu fears have yet to wreak havoc on the broad markets, but several industries including food, tourism, and transportation are already feeling some side effects. For example, cruise operator Carnival and Delta Air Lines both fell 14 percent on Monday, and shares of Tyson Foods—the country's biggest meat producer—dropped 12 percent (the S&P retreated 1 percent and the Dow, 0.6 percent.) Although it's too early to gauge the economic impact (the White House's official position), many analysts are already downplaying the potential threat. Here are five things to know about the swine flu and the stock market, given the information that is known so far:

1. Swine flu versus avian flu. Some investors are drawing parallels between swine flu and the 2003 outbreak of SARS in Hong Kong, which threw a wrench in industries including trade and travel and caused a 0.6 percent drop in East Asia’s gross domestic product. Given that swine flu appears somewhat treatable, Citigroup analyst Tobias Levkovich thinks there will be less impact on the markets this time around. "We doubt that the markets will react with the same worry as found during avian flu scares in the past when the [World Health Organization] estimated hundreds of billions of dollars in global costs," he wrote in a note to clients on Tuesday.

2. Irrational fears. Despite the fact that this swine flu is apparently transmitted from person to person, investors were quick to punish some food stocks on Monday—particularly those tied to pork (the shares have since regained some ground). The sell-off is partially based on emotional reactions, says John Derrick, director of research at U.S. Global Investors: "People are concerned, so they'll likely eat less pork rather than not," he says. "My sense overall is there's been pretty quick response and at this point, I'd be surprised if it got out of hand...in a couple of weeks this could be old news and we'll all be moving on and worrying about something else."

3. Excuse for a sell-off. Given the strong rally in stocks that began in early March, some investors may have seized on flu fears as an excuse to sell stocks. "We do not see the swine flu development as the factor that will derail the rally, but we are aware that many investors have not participated in the move and thus want some sort of pullback, so they do not underperform," writes Levkovich. "In that sense, we would expect some in the investment community to seize on swine flu as a reason to argue for selling into the rally."

4. Industries that could benefit and suffer. If the flu threat worsens, Americans could potentially reduce travel and visits to retailers, movie theaters, restaurants, and other public places. With recessionary pressures causing people to cut down on luxuries and discretionary spending, the travel industry is in an especially vulnerable position. An additional pullback from a flu scare will have a significant impact on cruise line stocks more than hotel companies, according to Zacks Research analyst Sean P. Smith, who thinks those in the worst position include Carnival and Royal Caribbean (which both have close quarters and itineraries including ports in Mexico.) Meanwhile, industries that could benefit include those that deal in home entertainment, as well as health care and biotechnology stocks (Levkovich thinks Gilead, which makes some anti-viral drugs, could get a boost in particular.)

5. Effect on Mexican stocks and international funds. With travel to the country already suffering due to a surge in drug-related gang violence, the swine flu signals more economic stress for Mexico. (On Monday, the country's Finance Minister Agustin Carstens said there's “high potential” that the outbreak will disrupt the economy, and that hotels and restaurants will feel the most impact.) Writes Citi’s Latin American equity strategist Geoffrey Dennis: "Of course, the longevity of the outbreak is unknown, and so it is still early...to attempt to tally the on-going effect on the Mexican economy, both in terms of lost consumption and lost production, which our economists already forecast to contract by 3.5 percent this year." He added that investors likely seized the opportunity to lighten their positions in Mexico yesterday not on account of fear, but because MSCI Mexico index has risen nearly 50 percent since the March 2 market low.