The FTSE All Share has bounced back to its pre-coronavirus peak (in total return terms), taking just under 17 months to return to the level reached on 17 January 2020.
This makes it its fastest full recovery in 40 years from a crash of more than 30 per cent.
Performance of index in coronavirus crash
Source: FE Analytics
The next fastest recovery took place after the Black Monday crash of 1987, when the index took about 24 months to return to its peak.
This is the most similar crash to the one seen last year in terms of trajectory – the FTSE All Share took less than four months to sink from peak to trough, between July and November. This was the fastest fall experienced by the index until last spring when it dropped 35.32 per cent in just over two months at the start of the coronavirus pandemic.
It was most similar too in terms of maximum drawdown: 35.89 per cent in 1987, compared with 45.28 per cent after the financial crisis and 45.42 per cent after the bursting of the dotcom bubble.
Biggest FTSE All Share crashes
Source: FE Analytics
Yet here the similarities end. Unlike the events that led to last year’s sell-off, there was little crossover between the stock market crash of 1987 and the global economy. The causes of this crash are difficult to pin down, with panic over high valuations, exacerbated by early forms of computerised trading, among the main culprits.
Clive Hale of Clive Hale Consulting worked as a trader during this period. In an article published in Trustnet Magazine last April, he recalled having to rely on Ceefax for the latest share prices, while many fund managers refused to even answer their phones.
“It got to the stage where orders were coming in so fast that they couldn’t be filled for at least an hour,” he said. “The option markets got completely dislocated. People who had been clever enough to buy put options couldn’t get a decent price for them.
“Later we heard from the CEO, who said he had had a phone call from the Bank of England saying, ‘you guys had better start buying this thing’. Then we had a strong relief rally.”
At the other end of the scale is the crash that resulted from the bursting of the dotcom bubble. The FTSE All Share took two and a half years to bottom out after peaking in September 2000, and didn’t return to its pre-crisis high until December 2005.
Yet while more than five years in negative territory sounds like a difficult pill to swallow for UK investors at the time, it was relatively swift compared with what happened to the MSCI World index.
Although it peaked and troughed around similar times to the FTSE All Share, it didn’t manage to fully rebound before the onset of the financial crisis in 2007. The closest it came was in October of that year, when its peak-to-trough losses stood at just 2.81 per cent; however, it then fell another 37.2 per cent. It didn’t rebound to its pre-dotcom bubble high until March 2010, about nine and a half years later.
Performance of indices after bursting of dotcom bubble
Source: FE Analytics
While the FTSE certainly wasn’t immune to the dotcom bubble, as evidenced by its 45.42 per cent maximum drawdown, the large representation of ‘old world’ sectors such as oil & gas, tobacco, miners and financials helped it recover faster than the global index.
A useful lesson for bargain hunters from the financial crisis is that buying at the lowest point of the market is no guarantee of making a strong return if you back the wrong horse. Someone who bought into RBS (now Natwest) on the day the FTSE All Share bottomed out, after the bank had already lost about 93 per cent of its value, would only be up 20.16 per cent more than 12 years later. And such investors can count themselves lucky: many of those who held other UK banks such as Northern Rock and Bradford & Bingley lost all their money.
The protracted recovery in the MSCI World after the dotcom bubble burst compared with the FTSE All Share is the opposite of what happened in the most recent crash, with the global index taking less than six months to bounce back from the bottom of the market to return to its pre-crisis peak.
This can be attributed to the high representation of tech stocks, which benefited from the acceleration of digitalisation in the numerous economic lockdowns of last year. In comparison, the FTSE has suffered from its high weighting to more economically sensitive sectors, which were hardest hit by the pandemic.
Despite the speed of the recovery, it is important that investors do not get carried away, especially those who have done particularly well in the rebound. There is little correlation with the funds that did best in the recovery from the post-financial crisis trough to its pre-crash level and those that did the best in the three years after it returned to its pre-crisis peak: a Trustnet article to be published next week will explore this in more detail.