First; a rewind. When COVID-19 first appeared in late 2019, it was mostly ignored, and thought to mostly stay within China. A few economists did speculate on how this could adversely affect the economy, but those discussions were brief, and ultimately it was thought that the virus would pass over in a few months. Fast forward to January, 2020. The virus is starting to spread, but the stock market is still chugging along as usual and in most countries stores can remain open. Then the February crash. This crash was HUGE; worse then 2008, worse then 2001, worse than 1991. It seemed that the stock market would not be enjoying itself for a very long time. But in March, for some reason, against all logic, the stock market skyrocketed.
Lets take a deep dive.
First lets lay out some key rules for how the stock market behaves:
Contrary to popular belief, the stock market is not like a GDP figure or a PPP figure. While these methods both have their flaws, which I will discuss in a later post, both of these figures represent the size of an economy one way or another. The stock market does not. Although the stock market CAN be helpful in determining the success of the economy, it is often misleading due to a few things. The stock market is easily influenced by fear and disinformation, or, on the other hand over hype and over excitement in the media, a good example being Tesla stock, which just in the course of a few months managed to go from about 230 US dollars to over 920. Whilst this is incredibly exciting as an investor, I myself invested in Tesla stock, it is a severe overvaluing of the company based of their rather low financial reports.
Now that we have established that stock markets do not necessarily reflect the real economy, lets get on to the meat of the topic.
The dead cat bounce:
The dead cat bounce is a rather contradictory phenomenon, the odd phrase coming from how if you were to drop a cat off a balcony (god forbid) it would bounce back up, and then sink to the ground. What is likely happening in the stock market right now, is a rather similar phenomenon. The exact cause of this is debatable, but the main reason a dead cat bounce happens is simply how stocks work; they either go all the way down to zero, or go up at some point or another. If this seems confusing, or even contradictory to you, there are many other great articles and blogs on the internet talking about this exact thing.
In conclusion, this short post has hopefully introduced to you two things, the first being that stocks are strange little numbers, and they don't reflect the real economy, the second being about the dead cat bounce, and how the stock market will always go up and down, even times of economic turmoil such as today.
I hope you enjoyed my first ever blog post, and I hope to make many more! Thanks for reading!