Did We Just Have A Dead Cat Bounce?

The phrase ‘dead cat bounce’ refers to the rather morbid idea that even a dead cat will bounce if it falls from a great height – it’s an old Wall Street turn of phrase. In other words, it means that it’s a temporary correction in a market that is destined to keep on falling.

Or, is it a real rally? Obviously only time will tell either way, however some fund managers have called the market bottom.

All market crashes are completely different, and that makes them very hard to call. The credit crunch in the early 2000’s was caused by over investment in new tech businesses that had never earned a profit, in some cases never had a customer! This destroyed the value in the market and led to a very severe fall and long climb back up. The more recent Credit crunch however, also caused havoc across the banking systems of the world and that led to a worldwide recession and severe fall in all asset classes.

If you look at the asset classes that are affected this time, it’s been very hard for fund managers to find an asset that hasn’t been also hit hard. US Treasuries fell significantly, and that should be a safe haven!

This is where experience comes in. I’m sure a few fairly young advisers just started during the credit crunch, but they never had to discuss what happens next with their clients. Many clients will be new investors and have only seen a few corrections, but not a fall of this magnitude, they will also be reeling from the shock. Those of us who have had well over 20 years in the markets can’t say we’ve seen it all before, because it’s different every time. We do know however, that markets eventually recover over time and that ‘time in the markets is more important than timing the markets’.

My perspective is this, this is an event, a very damaging event, but an event none the less. What do I mean about an event? It’s that once it’s over, it’s over. The credit crunch was not an event, it was a continuation of the collapse of the whole worlds banking system and took some time to get to grips with, it was far more serious. I know, people are now saying but look at the damage shutting down the world has done, look at the drop in GDP. I agree, it will cause a short deep recession, however in the West at least governments have stepped in to take the sting out of this, and we will have to pay that debt hangover for some years to come. However, after a couple of quarters of negative growth, employment will start to rise, and pent up demand will get the economy going again by the third quarter or at the latest the fourth.

Why do I think things will improve so fast?

This crash wasn’t caused by an overheated global economy, share prices were not stretched based on profits, profits were rather good. Interest rates were low, and are now even lower, inflation is benign and will continue to be in my estimation for some time to come. The central banks and governments have pumped in liquidity, hence the bounce, and so it will be easy for business to borrow and cheap.

Lots of people keep going on about ten years without a crash and we were due one, I don’t buy that, the metrics don’t show it either. Only the US was booming business wise, and only in the past three years, look at the growth around the world, especially in Europe, it was insipid at best. You cannot base the future on the past, you’re very lucky to guess what will happen next year! The markets recover 3 to 6 months before the economy does, so bear that in mind if you feel like timing the market or if you are looking to sell out of your investments.

Remember your investment goals and time frame before you decide sell out, and if you’re brave enough and have spare cash that you don’t need access to for the next five years at least, perhaps ‘being brave when everyone is fearful’ might be a good strategy.

Past performance is no indicator of future performance, the value of your investments can fall as well as rise. This is not advice, if you need advice please speak to your regulated IFA or contact me direct.

Kind regards Alan Lazenby

Managing Director of Lazenbys Financial Services Ltd

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