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.
Understanding a 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 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 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.
The steep stock market decline that rocketed markets in mid-August threw investors for a loop, with the Dow Jones Industrial Average (DJIA) dropping 800 points, or 3%, on August 14th, 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 Wal-Mart helped cool investor fears.
Similarly, stocks plunged across the board on Christmas Eve, 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 index all gained at least 5%. The Dow's rise of 1,086 points during that session was its biggest one-day rise.