Craig Baker: What can we learn from past bear markets during the COVID-19 pandemic?



Craig Baker, chairman of the Alliance Trust investment committee and Global CIO at Willis Towers Watson, discusses what the financial sector can learn from past economic crises. 

Craig Baker

Alliance Trust was founded in 1888 and been tested before in many major crises before the COVID-19 pandemic hit including two worlds wars, the Great Depression and numerous stock market crises. In fact, its roots go back even further into the Victorian era because it inherited the business of several Dundee-based mortgage companies.

With the 75th anniversary of VE day being celebrated tomorrow – albeit in a sober and sensibly socially-distanced format given the continuing health risks – it is apt to consider how markets have made it through previous crises, and how they might make it through the current challenge facing economies across the world.

By 1945, markets had experienced an intense depression following the 1929 Wall Street Crash and severe volatility during the Second World War. However, by VE day on 8 May global stock markets had proven relatively resilient. Importantly, after an initial slowdown, as global economies entered the post-war boom years markets proved able to bounce back over the long-term.

How have past bear markets fared? 

Over the last 185 years there have been 27 bear markets (defined as a 20%+ fall in the S&P500 Index) prior to this one, the first being the 1835-42 crash and the most recent being the 2007-09 GFC. The average fall in those 27 bear markets was 38%, and the average duration of the fall was 28 months.

The shortest of all of them was three months (1987 and 1990, where the falls were 34% and 20% respectively) and the longest was 82 months (1835-42, where the fall was 56%). The smallest drop was 20% (1990, over three months) and the largest was 85% (1929-32, over 33 months).

Interestingly, on average across all of these 27 bear markets it took five years after the fall to return to the same nominal index level (the shortest time being three months and the longest being 22 years) and nearly eight years to return to the same level in real terms (the shortest being six months and the longest being nearly 24 years).

What could follow the Covid-19 crisis? 

If markets simply continue to bounce back from here during the COVID-19 crisis, it will have turned out to be by far the shortest bear market in history at one month and slightly smaller than average (significantly larger than the average event-driven bear market but significantly smaller than the average structural bear market).

However, although I am confident in the long-term strategy of investing in equities. It is quite possible that equity markets have got too far ahead of the economic reality too quickly. It’s highly likely that volatility will continue and that we will see further sharp falls in the months ahead as the impact of the crisis on the real economy becomes apparent.

Investment trusts for income investors

Dividends are already becoming scarce in the UK but, unlike open-ended funds, investment trusts have the structural advantage of being able to retain a proportion of their earnings in good times to smooth dividend payments through the bad times. Alliance Trust has a progressive dividend policy, which has seen dividends increase every year for 53 years.

The Trust has strong revenue reserves, amounting to £109.2m at the end of 2019, some of the highest in the industry and more than two times last year’s pay-out, from which it can pay dividends if there is a shortfall in the income from the portfolio in any year.

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