Dead Cat Bounce?

Sure, we kind of have to talk about Felonious Punk’s pause on tariffs on everyone except China. Yes, the stock market soared. Yes, there’s a chance his remarks qualify as insider trading. Yes, Congress is looking into who bought what when. Yawn. So, what’s next? Will he change his mind again in the next week? Which direction do stocks go now? And… why all the cats?

Stock traders have a term for what we’re likely experiencing; it’s called a ‘Dead Cat Bounce.’ The term “dead cat bounce” refers to a temporary, short-lived recovery in the price of a declining stock or market that occurs after a significant fall, only for the downtrend to then continue. Think of the grimly colorful saying it comes from: “Even a dead cat will bounce if it falls from a great height.” Sure, yesterday looked nice, but what is going to happen next?

If we look at the futures market, yesterday was definitely nothing more than a bounce, and prices are likely to back away from yesterday’s highs. Some profit-taking is natural after such a big change, but the conditions that caused the prices to fall are still there. Sure, tariffs have been put on hold until the President changes his mind again, but there’s still a lot of uncertainty about a trade war with China, and other countries are starting to take China’s side in this fight.

What constitutes a Dead Cat Bounce? First of all, it happens after a stock or market index has experienced a substantial drop. If Punk hadn’t reversed course when he did, there were multiple markets about to hit Bear territory, more than 20% off a recent high. Bear markets change investor attitudes. Money stops moving around as much. The lack of new investment encourages the downward trend. Barring Punk’s change of mind, we likely would have awakened this morning to a full-on Bear market.

Then, boom, there’s a brief period where prices increase, making it look like a recovery might be starting. This is where we’re standing now. Is there going to be a great recovery or not? Don’t bet on it. Why? Because stock markets weren’t the reason for the change in direction, the bond market was getting way too shaky.

“I want to tell you right now that Donald Trump outsmarted the world. Trust me, I’m an American. I support my president—but that’s not really what happened here,” Charles Gasparino, an economic pundit whose words are closely watched in the White House, said on Faux News. “People focus on the stock market all the time, but it’s the bond market and the sort of lending markets that’s the plumbing of the economy. And those markets were imploding last night, and that’s why we have a 90-day freeze.”

Yeah, this wasn’t part of a planned strategy. Normally, when stocks go low, bonds go high, but they weren’t doing that this time. They were going lower, which demonstrates a lack of conviction in the way the country is being handled. Bondholders are concerned about the chaos and don’t see the US as a good investment.

So, it seems quite likely that we’ll see a return to ‘the fall,’ if not today, almost certainly Monday. The rally fails, and prices reverse course, falling again, often to levels below the point where the bounce started. That’s important. BELOW the point where the bounce started. The bond markets, which did not bounce yesterday, will see this as a sign of fiscal weakness and uncertainty.

Everyone brought a parachute on this flight, right?

The markets are always going up and down, though, right? Sure, we could even see a false signal that lasts a day or two. It’s a deceptive rally that can trap investors who buy in thinking the worst is over, only to face further losses. Why? Because the damage to the country’s financial system is too severe to recover from the bounce.

According to The Economist, even after the tariff pause, Treasury yields remain elevated. Global stocks are 11% below their highs in February—and justifiably so. [President Punk] has still raised America’s average tariff rate to over 25% since January, with the promise of more levies, including on pharmaceutical imports, to come. The president’s advisers display a jaw-dropping insouciance [we like the word. look it up] about the damage tariffs can do to the economy. In their view, foreigners foot the bill for tariffs, and market declines hurt only rich investors. Yet the dollar’s fall all but guarantees that tariffs will cause American consumer prices to surge, hurting households’ real incomes. The knock-on hit to consumer spending, including on goods made in America, is likely to be substantial, compounded by the blow to confidence from volatile stocks.

Hellooooooo, inflation. There has been a lot of hope that the inflation numbers would cool this month, but that may not be the case. Sudden reverses in direction cause the dollar to appear unstable. Already, there was talk before this about the Euro taking over as the default currency for international trade because the dollar has been too erratic. Yesterday’s about face doesn’t help steady anything. Instead, the move looks reckless and lacking in solid strategy.

Making matters far worse is the appearance that the President was intentionally manipulating the markets. When he posted the comment, “THIS IS A GREAT TIME TO BUY!!! DJT” it could be construed as a signal to friends and insiders to buy before the inevitable price jump coming from the afternoon announcement of a pause.

“How is this not market manipulation?” Representative Mike Levin, Democrat of California, said on social media, referring to action that is potentially illegal. “If you’re a [Punk] supporter and you did what he said and you bought, then you did great. On the other hand, if you’re a retiree or a senior or somebody in the middle class over the last few days that didn’t have the risk tolerance and you decided to sell, you got screwed.”

Kathleen Clark, a professor focusing on government ethics and corruption at the Washington University School of Law in St. Louis, said Punk’s actions “would ordinarily trigger an investigation by the Securities and Exchange Commission. If we still had a rule of law, a robust system for the rule of law, it would be investigated.”

Now, for the sake of clarity, please understand that a dead cat bounce can only be definitively identified in hindsight, after the price has already fallen again. Trying to trade based on whether a current small rally is a dead cat bounce or a genuine recovery is very risky.

But look at the investing environment. The tariffs on China are much more disruptive than most of us care to consider. Punk has done nothing that would indicate a sense of stability. The remaining tariffs are merely ‘paused,’ and nothing is stopping the President from deciding that he doesn’t want to wait 90 days before putting them back in place.

This is not an investor-friendly environment. The smarter move is to save your money where you can, buy only necessities that you know you’re going to need, and don’t incur any new debt if possible. Maybe our analysis is wrong.

 In a mere ten days, the president has ended the old certainties that underpinned the world economy, replacing them with extraordinary levels of volatility and confusion. Some of the chaos may have abated for now. But it will take a very long time to rebuild what has been lost.

Proceed with caution.