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Is this a dead cat bounce?

17th April, 2020

The recent performance from stock markets has given investors some cause for cheer amid the general gloom. However, could this be a dead cat bounce rather than a genuine cause for optimism?

Stock markets have been a little more buoyant in recent days on optimism that we are turning a corner in the coronavirus pandemic. There has been some stabilisation in infections across Europe, suggesting lockdown measures are proving effective and with it, the hope they may be gradually lifted. Have markets really found a floor? Or is this simply a ‘dead cat bounce’?

It is not clear who first started ‘dead cat bounce’, but it has come to mean a short-term rally in an otherwise declining market. As such, it is notably different from the market nadir, which is when markets begin their slow progress towards recovery. Dead cat bounces are common in bear markets: in the bear market from October 2007 to March 2009, there were several moments when the gloom lifted temporarily – from March 2008 to May 2008, the FTSE 100 rose from 5,700 to 6,200 for example.

The main argument that this is the bottom of the market, is that markets have fallen very hard and very fast. They now reflect a very gloomy scenario for economic growth and earnings. At the same time, policymakers have launched vast and ambitious stimulus packages that should help counterbalance the impact of the slowdown. While this may not be the absolute bottom, it is difficult to see it going much lower.

On the other hand, markets will have a vast amount of bad news to process over the coming months. From horrible PMI numbers to slumping GDP growth to savage declines in corporate earnings, it is unlikely that markets will remain stoic in the face of painful numbers. Equally, company management teams are likely to take this as an excuse to ‘kitchen sink’ any other bad news, getting it all out of the way in one go.

Although it feels pretty bad, the simple truth is that it may not be bad enough yet. While the prices certainly look more attractive, it is impossible to quantify the earnings side of the equation. That makes it difficult to identify value. With a third wave now hitting countries such as Singapore, which had previously been thought to have handled the virus well, it’s clear that this problem has much further to run.

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