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Central Markets by Robert Lloyd, CFA

The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the  information cannot be guaranteed. All opinions and outlooks are subject to change.

  • Writer's pictureRobert Lloyd, CFA

The 1918 Spanish Flu Comparison: Good News and Bad News

  • There are several different narratives comparing the 1918 Spanish Flu to Covid-19

  • Good News: The stock market did not collapse 1918-1922

  • Bad News: Earnings collapsed 83% 1918-1921

  • Valuations then and now are in different universes

By now, many of you are familiar with the general progression of the Spanish Flu in 1918-1920. It passed through the world in 4 waves of differing intensity: 1) Spring of 1918, 2) Fall of 1918, 3) Winter 1919, and finally 4) Spring 1920. In the United States, 675,000 people died; worldwide fatalities are estimated at 40 million. The high death rate and effect on the mood of the country were considered major factors in the Depression that afflicted the country in 1920 (The word Depression is how it was described back then; today we know words like Recession, Depression, Great Depression do not have strict definitions, but are defined in our cultural memory.)

We are a nation of specialists and we tend to look at history through the lens of our areas of expertise. The medical experts focus on the 1918 epidemic as the defining moment of this period. The economists focus on the Federal Reserve and their mistaken attempt to suppress inflation by raising interest rates in January 1920. The military reflects on the experience of WWI: industrialized warfare, massive loss of life and a revolution in war fighting technology and tactics. Of course, all these perspectives are useful. As portfolio managers, we have to accept the world as it is: a complicated place with offsetting factors, all of which may be affecting market prices.

Our primary goal in analyzing the past is to find hints as to how the market reacted to a particular situation. We know the Spanish Flu was deadly and many localities created policies that we see echoed today in our social distancing rules. We also know the end of WWI lowered government spending world-wide as hostility ended and the Fed raised interest rates on fears of inflation. So, what did all these factors do to stock prices and the earnings supporting them?

From the peak of the war in 1918 to the trough in 1921, corporate earnings fell 83%.The end of war spending, tighter Fed policies and the Spanish Flu all played a role. That is the bad news. Today, we see the Federal government spending massively on stimulus to offset the collapse in private sector spending, but the private sector remains weak. During the Spanish Flu, the economy did not trough until well after the last outbreak during the epidemic.

The good news is that during this episode of economic weakness the reconstructed stock composite only fell 32%. Part of that may have been the structurally low levels of company valuations back then.

Let's look at Price/Earnings ratios at this time. Both Raw PE (monthly stock composite divided by current earnings) and P/E 10 (rolling 10 year PE), were near 5x during the war. You can see as earnings fell 1919-1922, the Raw ratio climbed dramatically because the stock market never reflected the earnings disaster. That is the good news.

The first conclusion from this exercise is that the economic impact of Covid-19 will be with us for a long time. Not only have government policies suppressed economic activity in certain places, but consumers themselves are changing their behavior even in localities where there are no government mandates to social distance. It will take time for consumers to regain confidence to shop and spend; it will take time for lost business capital to be replenished.

The second conclusion from this analysis is that analyzing the stock market's behavior during the Spanish Flu to gain insight on Covid-19 might ultimately prove fruitless. Today, the P/E 10 is 30.7; compare that to January 1920's reading of 5.4. These valuation numbers are in different universes and may not be comparable for a variety of reasons. We are in the midst of a long period of central bank stimulus focused on asset markets that is designed to help the real economies of the world by helping financial markets. This means the valuation starting point for today's market is much, much higher that experienced in 1920. If our economic problems stretch out several years as they did in the 1920's, we should expect more volatility because the market is expecting a quick earnings recovery.

When I was growing up there was a radio announcer named Paul Harvey who told funny stories that always had a twist. He called it, "the rest of the story." Here is my version of the rest of the story. It is a chart of the stock composite and earnings 1913 - 1925 so we can include WW1, the Spanish Flu, the 1920 Depression and recovery. There is enormous chop to the market and reflects our market outlook for the next few years.


  1. Narrative Economics, January 2017, Cowles Foundation Discussion Paper No. 2069 by Robert Shiller.

  2. Stock Market Data Used in "Irrational Exuberance" Princeton University Press, 2000, 2005, 2015, updated, by Robert Shiller.

  3. Pandemic Economics: The 1918 Influenza and Its Modern-Day Implications, by Thomas Garrett

Robert Lloyd, CFA® is President and Chief Investment Officer of Lloyds Intrepid Wealth Management, and author of the book CENTRAL MARKETS. Since 1994, he has held positions as a trader, analyst, portfolio manager, and wealth manager while working at Invesco, CCM Opportunistic Advisors, and Merrill Lynch. In another life, he served 8 years in the U.S. Navy as a Naval Flight Officer flying in the S-3B Viking. For a complete resumé, visit his profile at LinkedIn.

Rob holds a BBA from the University of Notre Dame and an MBA from the University of Chicago.

Rob is a Chartered Financial Analyst.

Lloyds Intrepid LLC is doing business as Lloyds Intrepid Wealth Management. Lloyds Intrepid LLC offers investment advisory services in the State of Texas where registered and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Lloyds Intrepid LLC and its advisers do not provide legal, tax or accounting advice. Lloyds Intrepid LLC formulates retirement plans, investment strategies, portfolio construction and investment due diligence for clients with signed investment advisory agreements with us. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All opinions and outlooks are subject to change.

© 2020 Lloyds Intrepid LLC

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