What Is a Rebound?
In finance and economics, a rebound refers to a recovery from a prior period of negative activity or losses—such as a company posting strong results after a year of losses or introducing a successful product line after struggling with false starts.
In the context of stocks or other securities, a rebound means that the price has risen from a lower level.
For the general economy, a rebound means that economic activity has increased from lower levels, such as the bounce back following a recession.
- Rebounds occur when events, trends, or securities switch course and move higher after a period of decline.
- A company might report strong earnings in its fiscal year after the previous year's losses or a successful product launch after several duds.
- In terms of the stock market, a rebound could be a day or a period of time in which a stock, or the stock market overall, recovers after a selloff.
- When it comes to the economy, a rebound is part of the normal business cycle that includes expansion, peak, recession, trough, and recovery.
Rebounds are a natural occurrence as part of the business cycle, the cyclical phases of expansion and contraction that naturally occur in the economy. Economic recessions and market declines, indeed, are an inevitable part of the business cycle. Economic recessions occur periodically when business grows too quickly relative to the growth of the economy.
Similarly, 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.
The economy is also defined by periods of rebounding off of periods of sluggish activity or shrinking gross domestic product (GDP). 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, as economic activity picks up steam and GDP growth turns positive again. Economic rebounds may be aided by monetary and/or fiscal stimulus enacted by policymakers.
Regardless of the type of decline—whether it be economic, housing prices, commodity prices, or stocks—in all instances, historically, a decline has been followed by a rebound.
Dead Cat Bounce vs. Trend Reversal
A rebound may signal a reversal in a prevailing downtrend from bearish to bullish. However, it may also be a dead cat bounce, or false rally, that continues on to a steeper selloff. A dead cat bounce is a continuation pattern, where at first there is a strong rebound that appears to be a reversal of the secular trend, but it is quickly followed by a continuation of the downward price move. It becomes a dead cat bounce (and not a reversal) after the price drops below its prior low.
Frequently, downtrends are interrupted by brief periods of recovery, or small rallies, when prices temporarily rebound. This can be a result of traders or investors closing out short positions or buying on the assumption that the security has reached a bottom.
Historical Examples of Rebounds
Stock market prices often rebound after a steep selloff as investors seek to purchase shares at a bargain price and technical signals indicate that the move was oversold. Below, we highlight just a couple of the myriad examples of stock market rebounds that have occurred.
The steep stock market decline that rocked markets in mid-August 2019 threw investors for a loop, with the Dow Jones Industrial Average (DJIA) dropping 800 points, or 3%, on Aug. 14, 2019, in the worst trading day of that year. But the blue-chip bellwether rebounded a bit the following session, gaining nearly 100 points back after strong July retail sales figures, and better-than-expected quarterly results from Walmart Inc. (WMT) helped cool investor fears.
Similarly, stocks plunged across the board on Christmas Eve in 2018, in a shortened session, with economic fears causing the indexes to post their worst pre-Christmas day losses in many years—in the case of the Dow, the worst ever in its 122-year history. But on the first trading day after Christmas, on Dec. 26, 2018, the Dow Jones Industrial Average, the S&P 500, the Nasdaq Composite, and the small-cap Russell 2000 all gained at least 5%. The Dow's rise of 1,086 points during that session was its biggest one-day rise.
What Causes a Market to Rebound?
Markets can rebound for several reasons. A steep decline may result in oversold conditions, where fundamentals support higher prices. This can lead investors to look objectively at buying rather than selling with fear. The demand for stocks can also increase as the economy turns around from a recession. Increased aggregate demand and business growth point to higher profits and higher stock prices.
In the short term, a rebound can be caused by more technical factors, but these tend to be short lived. For instance, a dead cat bounce can result from the covering of short positions or technical traders incorrectly believing the bottom has been reached. Ultimately, the dead cat bounce is not founded on fundamentals, so the market continues to decline soon after.
How Long Does it Usually Take the Economy to Rebound From a Recession?
The average length of recessions in the U.S. since World War II has been just around 11 months. The Great Recession was the longest one during this period, reaching 18 months.
How Long Does it Usually Take Bear Markets to Rebound?
The average length of a bear market has been around 9.5 months, and they occur, on average, around 3.5 years apart from each other. Note that bear markets do not always coincide with economic recessions.
The Bottom Line
The old saying goes "what goes up, must come down." But when it comes to economic and financial matters, often what goes down will eventually rebound and go back up. Bear markets have always rebounded to bull markets, and recessions eventually rebound to expansion and growth. Investors must be aware that not all rebounds are long lasting, however. A dead cat bounce or sucker's rally, for instance, can lure investors into buying for technical or momentum reasons while fundamentals do not support a true trend reversal.