A dead cat bounce is a temporary resurgence in stock prices after a substantial fall. The phrase originated on Wall Street, derived from the idea that “even a dead cat will bounce if it falls from a great height.”
That’s what investors saw last week as stock markets rallied for three days before slumping again to close out the week. Here’s what the S&P 500 and TSX Composite Index looked like over the past three months:
At its low on March 23 the TSX was down an incredible 34.2 percent – with most of the damage coming in just a one-month period. The S&P 500 hasn’t fared much better, down 30.75 percent over the same period.
Investors who panicked and sold at the bottom missed out on this brief rally. As swiftly as markets have fallen, prices can rise just as fast. Look no further than March 24, where the TSX surged nearly 12 percent in a single trading day.
But the dreaded “dead cat bounce” theory surfaced Friday when stocks fell again by 5 percent. It seems we’re not out of the woods yet.
As you can imagine, I’ve received a lot of questions from readers and clients about the current state of the market. Here’s what I know:
Honestly, no one knows what happens next. Markets fell so fast and so quick. It’s unheard of to see a 30+ percent drop in one month. For perspective, the worst month of the financial crisis only saw a 14 percent decline.
Many are saying the worst is yet to come because North America hasn’t reached the peak of the pandemic and job numbers are going to look awful. But you could easily argue that the market knows this already and bad news is already priced in. Who knows?
I wouldn’t be surprised if markets fall another 10-20 percent. I also wouldn’t be surprised if we’ve reached the bottom and markets start to stabilize.
Stick to your plan, and rebalance if you can. Mind your personal finances and ensure you have enough cash (or income) to survive the coming weeks and months. Consider delaying any large expenditures planned for the year. One client planned to build a garage this year – that project has been moved to 2021. Perhaps you can divert money earmarked for travel to go into your emergency fund instead.
Much has changed since I shared my 2020 financial goals. Next week I’ll share with you how I’m managing our personal finances and investments through the COVID-19 crisis. Hopefully it gives you some ideas to consider for your own financial plan.
Until then, stay well and stay home!
This Week’s Recap:
Falling interest rates have forced many banks to lower their rates on savings deposits. This week I compared high interest savings accounts to GICs to determine where savers and investors should park their cash.
From the archives: Using annuities to create your own personal pension in retirement
The latest Bank of Canada interest rate cut took its key lending rate down to 0.25 percent. The banks have passed along the decrease to their own prime rate – which means our variable rate mortgage just fell to an unheard of 1.45 percent:
— Boomer and Echo (@BoomerandEcho) March 28, 2020
Promo of the Week:
Canadians can get their Equifax credit score for free from online lender Borrowell. It won’t affect your credit score and Borrowell uses bank-level encryption to ensure your information stays safe.
An important read – Credit Card Genius explains how to protect your credit score during the Coronavirus pandemic.
Exchanging credit card points for gift cards is typically a poor financial move, but Barry Choi argues that using your points to help pay your bills or expenses might be an excellent idea in challenging times.
Zoom Video Communications stock (NASDAQ: ZM) is thriving as employees are working from home and using its technology to stay connected. Zoom Technologies, a Chinese holding company, has also seen its shares spike as investors confuse the two Zooms.
Rob Carrick says banks are trying for a kumbaya moment with their virus response. Can you trust it?
“When banks are e-mailing to say they’re here to help you through this crisis, you might expect at least a touch of self-sacrifice.”
A Wealth of Common Sense blogger Ben Carlson shares a guide to surviving your very first market crash.
Michael James writes a thoughtful response to a reader asking what to do about the stock market crash.
Preet Banerjee has put together a list of free financial consultations and resources for people in need during the Coronavirus pandemic:
Please give Preet a follow on Twitter and on Instagram as he has been diligently putting together helpful videos to explain the Canadian Emergency Response Benefit, and the new temporary wage subsidy (among others).
How the humble GIC goes from schlub to stud in just four weeks as stocks tumble.
Half Banked blogger Des Odjick shares how she’s managing her money during the COVID-19 chaos.
Ben Carlson also shares how he’s managing his own money through the crisis.
Wise words from My Own Advisor Mark Seed, who says there is no perfect personal finance plan to combat something like this.
Nick Maggiulli writes about buying during a crisis – a new framework for investing amid financial panic:
“There is a silver lining for investors who are buyers of equities right now. Every dollar they invest in the current market environment will grow to far more than one invested in months prior, assuming that the market eventually recovers.”
Along the same lines, writer Chris Taylor says, if you can, increase your retirement contributions right now.
Pandemic personal finance update: Three things you can do right now to defend your family finances.
While market crashes can be seen as a positive for those in the accumulation phase, it’s a different story for retired folks. Here’s how the market crash impacts retirees.
Finally, the Irrelevant Investor Michael Batnick explains how to fight hindsight bias.
Stay well, everyone!