Editor's note: Our good friend Enrique Abeyta's life story could be a Hollywood movie...

Enrique survived a rough childhood. The son of an alcoholic father and a political exile mother, he defied the odds and went on to excel at the prestigious Wharton business school and later, on Wall Street – where he grew his first hedge fund by more than 130,000%.

Last fall, Enrique joined our corporate affiliate Empire Financial Research. And as his colleague and Empire Financial Research founder Whitney Tilson recently described him...

"He is neither a value nor growth investor, but simply a stone-cold moneymaker."

In this weekend's Masters Series, we're featuring a pair of essays from Enrique. Today's edition is adapted from the April 15 issue of Enrique's Empire Elite Trader advisory. In it, Enrique steps back in time to explain what the 1918 Spanish flu pandemic can tell us about what to expect from today's markets amidst the coronavirus crisis...

How the 1918 Spanish Flu Can Navigate Us Through These Choppy Markets

By Enrique Abeyta, editor, Empire Elite Growth

At this point, you've likely heard the comparisons with the current coronavirus crisis to the 1918 Spanish flu pandemic.

This health crisis began in spring 1918 as a particularly deadly strain of the flu and began to spread across the globe. It didn't originate in Spain... but the name stuck because Spain was particularly hard-hit.

The spread of the flu was likely exacerbated by the end of World War I as American troops returned from Europe and then spread out across the U.S. The world was a much "smaller" place back then with less international travel, but this mass global movement of people helped the disease spread. In this way, the world of 1918 had some similarities to today.

While certainly different than the current virus, this flu also had some unique characteristics... For one, it hit adults aged 15 to 44 particularly hard. This is rare in a flu (even a bad one), and magnified the economic impact in the short and long term.

Given the lack of many modern medical technologies, the mortality rate was devastating across the globe. According to estimates, it likely infected upward of 500 million people – more than a quarter of the global population. It also killed as many as 50 million (or by some estimates, 100 million), or roughly 3% of the global population.

To put this in perspective – and the coronavirus pandemic isn't over by any means – we have reportedly seen more than 270,000 deaths out of a global population of 7.8 billion, or 0.003%.

Wiping out such a large percentage of working-age adults had a particularly big negative impact on the global and U.S. economies. Additionally, U.S. cities undertook similar shutdown and quarantine procedures as they have today.

That said, determining the economic impact of the Spanish flu pandemic on the U.S. economy is difficult. We don't have the wealth of economic data from back then as we do today, and the death of those working-age adults was a big difference. Additionally, other factors such as the end of World War I and the actions (or inactions) of the U.S. government from a monetary and fiscal perspective mean that the economic analogies to today aren't exact.

A recent Wall Street Journal article provided some data from the National Bureau of Economic Research. Based on an index of industrial production and trade, this measure fell sharply and then bottomed. It then quickly recovered some of the losses, but then stayed at a lower level through 1920. Again, the end of World War I likely also had an effect here.

The bureau also uses an index of factory employment. This was also hit similarly, but then recovered to previous highs within 18 months. Part of this drop is likely attributed to the deaths of 675,000 people in the U.S., or 0.6% of the population.

But let's take a look at the Dow Jones Industrial Average around this period...

The stock market had a rough year in 1917 – mostly due to World War I – but was recovering in early 1918. During this period of economic disruption and incredible volatility with the pandemic, though, the stock market moved much higher. Take a look...

The economy today is certainly much different, but even the worst-case scenarios for the crisis plan for only a fraction of the mortalities that happened during this historical period. Additionally, the disruption to the economy back then was arguably worse than it is today.

Looking back at 1918, the economy took a long period to recover while employment moved back to previous levels and the stock market soared.

It's difficult to come up with a strong hypothesis about why the stock market performed like it did in 1918, much less why it performs like it has today (and we have a ton more data and insight!).

But consider the amount of liquidity that global governments are injecting into the economy right now...

One of the criticisms of the economic recovery of the past decade has been that we haven't seen nearly the same recovery (or growth) in economic output as we did in asset prices.

This could be a reasonable road map for the period we are in right now: Slower recovery in the real world, but the injection of liquidity "supercharges" asset prices. Just take a look at the Dow over the next decade, following our previous chart...

So how can you navigate through these volatile times?

In today's market, most stocks are trading in unison.

Depending on the sector, there are differences in degree of magnitude. Industries that are the most hard-hit – like airlines, cruise ships, and hospitality – are down the most.

The industries hit the least – like e-commerce, big tech, and software – have fallen less. All but a few areas, though, are down... and they too have moved together.

Because of that, the individual fundamentals of a company matter less than they normally do right now. Remember that the market is driving most individual stocks. This is crucial to keep in mind with any individual trades and your overall portfolio. And patience is key...

While I'm still more optimistic than the consensus is for the intermediate- and long-term outlook... I expect more volatility and market pain is ahead.

This is the high-probability bet. It doesn't mean that it's a 100% certainty, but it makes the most sense for technical and fundamental reasons.

If this happens, investors will have a rare chance to buy shares of world-class businesses... stocks with multibagger upside potential. Don't miss out.

Regards,

Enrique Abeyta

Editor's note: Our friends at Empire Financial Research just put together a fascinating documentary about Enrique's "rags to riches" story... He went from sleeping in a car behind a run-down motel in Arizona to earning millions for himself and his hedge-fund clients. Enrique lays everything out in detail during this brand-new video... And you'll even learn the name of one of his favorite stocks today. Watch the full documentary right here.