Rebound

DEFINITION of 'Rebound'

In financial terms, a rebound means a recovery from prior negative activity. For a security, a rebound means that it has moved higher from a lower price. For the general economy, a rebound means that economic activity has increased from lower levels, such as the bounce back following a recession.

A recession is defined by economists as two consecutive quarters without economic growth. Recessions are part of the business cycle which consists of expansion, peak, recession, trough and recovery. A rebound from a recession would occur in the recovery stage.

BREAKING DOWN 'Rebound'

Rebounds are a natural occurrence as part of the ever-changing business cycles. Economic recessions and market declines are an inevitable part of the business cycles. Economic recessions occur periodically when business expands too quickly, and stock market declines occur when stocks become overvalued in relation to the pace of economic expansion. The price of commodities, such as oil, declines when supply exceeds demand. In some extreme cases, such as the housing bubble, prices may decline when asset values become overinflated due to speculation. However, in every instance, a decline has been followed by a rebound.

Recent Examples of Rebounds

The steep stock market decline that ushered in the New Year in 2016 was thought to be a harbinger of bad things to come, with many analysts predicting the start of a protracted decline. In the first three weeks of the year, the Dow Jones Industrial Average (DJIA) fell more than 2,000 points on increasing concerns over a possible global recession and crashing oil prices. After bottoming out at 15,600 on Feb. 11, the DJIA rebounded sharply and in a little over a month climbed back over 17,422 where it started the year. As of May 2, 2016, the DJIA is up 2.5% on the year.

The stunning drop in oil prices over the course of 2015 contributed to the unease in the stock market in the second half of the year. Oil prices continued to decline into 2016, which was one of the main triggers for the steep stock market decline in January and February. The price of oil hit $27 a barrel in January after a two-year decline from $115. Over the next three months, the price of oil rebounded to more than $45 a barrel as of April 29, 2016. Although it has a long way to go to fully recover to its previous highs, the rebound of oil to more than $40 a barrel can improve the solvency of oil producers in danger of defaulting on their debt.

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