Background
“Dead Cat Bounce” is a colloquial term commonly used in the world of finance and stock market trading. It refers to a brief and temporary recovery in the price of a declining stock. The phenomenon is based on the premise that a stock’s downward trajectory is so steep that even temporary positive movements are perceived much like a dead cat supposedly bouncing slightly after hitting the ground.
Historical Context
The term is believed to have originated in the financial markets during the 1980s. It was notably used after the stock market crash of 1987, where a temporary recovery was observed shortly after a significant downturn. The phrase has since become embedded in financial jargon to explain temporary market corrections that do not indicate a sustained rebound.
Definitions and Concepts
At its core, a “dead cat bounce” describes a pattern where a temporary, short-lived recovery in stock prices follows a significant downturn or crash. Despite the temporary uptick, the prevailing trend remains downward, and the fundamental weaknesses that caused the initial decline persist.
Major Analytical Frameworks
Classical Economics
Classical viewpoints, focusing on market equilibrium and rational behavior, might not heavily emphasize temporary anomalies such as the “dead cat bounce.” Instead, they focus on long-term trends and the invisible hand guiding efficient markets.
Neoclassical Economics
This framework operates on assumptions regarding rational behavior and market efficiency, also not placing much emphasis on short-term volatilities. A “dead cat bounce” might be seen as a minor anomaly not affecting the long-term equilibrium.
Keynesian Economics
In Keynesian economics, temporary market recoveries such as a “dead cat bounce” could be examined in the context of investor sentiment, market psychology, and short-term corrective measures. This school of thought accommodates the idea of market anomalies influenced by human behavior and sentiment.
Marxian Economics
Marxian analysis might interpret a “dead cat bounce” as an inevitable but insignificant market adjustment in a capitalist system fraught with periodic crises of overproduction and financial instability.
Institutional Economics
This perspective would explore how institutional factors and market structures contribute to these temporary bounces. Factors like news releases, policy changes, and economic reports can all lead to a short-term positive spike in an otherwise declining market.
Behavioral Economics
Behavioral economics pays particular attention to market psychology and investor behavior, providing a robust framework for understanding the “dead cat bounce.” Cognitive biases, such as overreaction to news or the gambler’s fallacy, often explain such phenomena.
Post-Keynesian Economics
Post-Keynesian theory, with its focus on financial markets’ endogenous instability, would argue that a “dead cat bounce” reflects inherent uncertainties and speculative behaviors in financial markets.
Austrian Economics
Austrian economists might see the “dead cat bounce” as an example of market cycles influenced by errors in market participants’ plans, cautioning that government intervention often exacerbates these misallocations of resources.
Development Economics
In developing economies, a “dead cat bounce” might signify exaggerated reactions to political or economic news, showing how fragile these markets can be to both local and global shocks.
Monetarism
Monetarists would likely focus on the role of monetary policy and liquidity in contributing to market movements, examining whether the temporary spike is due to short-term changes in money supply or investor expectations about policy shifts.
Comparative Analysis
When comparing frameworks, Classical and Neoclassical theories lean on the expectation of market self-correction, often downplaying short-term anomalies. Meanwhile, Keynesian, Behavioral, and Institutional economists provide richer lenses for understanding the transitory nature and causes of these market bounces.
Case Studies
Detailed case studies of market events like the post-1987 crash recovery, short-lived rebounds during the 2008 financial crisis, and quick upticks amidst the 2020 pandemic can illuminate underlying dynamics leading to a “dead cat bounce.”
Suggested Books for Further Studies
- “A Random Walk Down Wall Street” by Burton G. Malkiel
- “The (Mis)Behaviour of Markets” by Benoit B. Mandelbrot and Richard L. Hudson
- “Irrational Exuberance” by Robert J. Shiller
- “Manias, Panics, and Crashes: A History of Financial Crises” by Charles P. Kindleberger
Related Terms with Definitions
- Market Correction: A reverse movement, usually downward, of at least 10% in a stock, bond, commodity, or index to adjust for overvaluation.
- Bear Market: A market condition where securities prices fall by 20% or more.
- Bull Trap: A false market signal where a declining stock price appears to reverse and start an upward trend, which ultimately continues downward.
- Volatility: Statistical measure of the dispersion of returns for a given
