Record-breaking crash, rapid rebound – is this a recovery or “dead cat bounce”?

Covid-19 sparked the fastest stock market crash on record, when the Dow Jones Industrial Average index of US stocks (‘the Dow’) fell by over 30% in only 25 trading days from 6 February.

Even in the Great Depression, it took almost twice as long to fall this far.


Past Performance is not a guide to future performance and may not be repeated. 

Source: Samuel H. Williamson, 'Daily Closing Value of the Dow Jones Average, 1885 to Present,' MeasuringWorth, 2020, and Schroders. Analysis based on changes in the price level of the Dow Jones Industrial average, as there is not a long enough history of daily total return data.

The second act in this unfolding drama has been a phenomenal rally. At one stage, the Dow was up by almost 30% from its 23 March trough. Some of the biggest companies in the world are back trading at all-time highs.

This begs the question of whether financial markets have turned a corner, even as the human impact of Covid-19 continues to be deeply troubling?

The current situation is unique, and we have never seen monetary and fiscal support on such a scale and at such a speed before.

However, many aspects of human behaviour which influence markets in the short-term are timeless. Fear and pessimism, and greed and optimism, have played prominent roles through the ages. As a result, analysis of how investors and markets have behaved in the aftermath of historic crashes can provide useful insights into how they might behave this time around. And give clues as to how likely it is that the stock market has really turned a corner…

Analysis of 135 years of data

We have analysed Dow Jones index data on US stocks stretching back to the year 1885. There is not daily data on total returns (including reinvested dividends) which stretches back far enough, so we have analysed its price level.

This differs from our earlier analysis of big market crashes, which was based on monthly total returns on the S&P 500 index of US stocks. The switch is necessary for this analysis because monthly data would be insufficient to capture some of the short-term rebounds that occur after crashes.

It is also important to note that the Dow Jones index is constructed differently to the S&P 500 index. It only covers 30 stocks and constituents are weighted by their share prices, rather than their market capitalisations.

False dawns are a regular occurrence

In 11 of the 13 previous historic episodes since 1885 where the Dow has fallen by at least 25%, there has been a rebound of at least 10% somewhere on the way to the bottom – a false dawn, also known in less feline-friendly language as a “dead cat bounce”.

Usually there has been more than one; the average number in any big down-market has been around three. There were four in each of the global financial crisis and the dotcom crash.

The Great Depression was exceptionally depressing for many reasons. The number of false dawns between 1929 and 1932 would have dented the spirits of even the most optimistic soul. The Dow rallied by at least 10% on eight occasions before it finally bottomed out. In five of these, the rebound exceeded 20%. Twice it exceeded 30%. In the most extreme case, it soared by 48% in only around five months between 13 November 1929 and 17 April 1930, before dropping by almost 30% in the next two months. And then by another 80% over the next two years.


Past Performance is not a guide to future performance and may not be repeated. 

False dawn measured as the maximum rise from a low point, which was ultimately breached once again at a later stage. Source: Samuel H. Williamson, 'Daily Closing Value of the Dow Jones Average, 1885 to Present,' MeasuringWorth, 2020, and Schroders.

What should we make of the current rebound?

We are in the midst of a global pandemic, where a significant proportion of the earth’s population is likely to become infected and a large number will die. Large parts of the global economy are coming to an unexpected and abrupt standstill for an unknown period of time. Risks of second waves of the infection cannot be ruled out when restrictions are lifted – there are early indications of this happening in parts of Asia. Markets hate uncertainty so it is not surprising that the stock market went into a tailspin earlier this year.

Schroders’ CIO, Johanna Kyrklund, quoted recently from Winston Churchill: “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. Given the record-breaking pace of the crash in the first quarter, a huge amount of pessimism was priced in. From that starting point, things didn’t have to get better for there to be a rebound. They just had to become “less bad”. A slowdown in case numbers in continental Europe has provided that welcome relief, also giving a roadmap for how things may develop elsewhere.

And, of course, economies and financial markets have received unprecedented levels of support from central banks and governments around the world. A day of reckoning will come when the consequences of this will need to be resolved, but that is a problem for another day.

So, a case can be made for things being a lot worse than they were at the start of the year but not as bad as might have been feared in early March. Will we see the market hit new lows? History would suggest that there is a good possibility that we will. False dawns are a common occurrence and there remains a lot that could go wrong. We may not be out of the woods yet.

The aim here is not to encourage undue pessimism or for you to rush off and sell all of your stocks, hoping to buy back in at a lower price in future. No one has a crystal ball and attempting to time the market is notoriously difficult. It demands a lot of resources and expertise.

However, just as fear was the dominant emotion a matter of weeks ago, you should be wary of letting greed take over now. Better to stay disciplined and remind yourself of the long term goals of your stock market portfolio – saving for retirement, a house purchase, or a rainy-day fund, for example. The risk of taking a big short-term position and getting it wrong is high. It is rarely a good idea to let your emotions get the better of you when investing.

The opinions contained herein are those of the author and do not necessarily represent the house view. This document is intended to be for information purposes only. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Cazenove Capital does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Cazenove Capital has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Cazenove Capital is part of the Schroder Group and a trading name of Schroder & Co. Registered Office at 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. For your security, communications may be taped and monitored. 

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