Understanding Dead Cat Bounce and Five Essential Terms for the Trade War

President Donald Trump's trade war has introduced terms that might be unfamiliar to many news readers, especially those related to investments and financial markets. As the impact of recent tariffs becomes apparent, understanding these terms is crucial. This guide explains some of the most common financial jargon.

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A "bear market" occurs when a major index like the S&P 500 or Dow Jones Industrial Average drops by 20% or more from a recent peak over a sustained period. The term "bear" is used because bears hibernate, symbolising a market in retreat. Conversely, a rising market is called a "bull market" because bulls charge forward.

Understanding Market Terms

The phrase "dead cat bounce" describes a brief recovery in stock prices during a downward trend. It suggests that even a dead cat will bounce if it falls from a great height, indicating that the recovery is temporary and the decline will likely continue.

"Capitulation" happens when investors decide to sell their assets, abandoning hope of recovering losses due to fear and falling prices. This often occurs during periods of low confidence and high volatility. While capitulation can signal a market bottom, it's usually identified only in hindsight.

Economic Indicators

A "recession" is marked by economic contraction and rising unemployment. The National Bureau of Economic Research officially declares recessions based on factors like employment trends, income levels, spending, retail sales, and factory output. Their Business Cycle Dating Committee defines it as "a significant decline in economic activity that is spread across the economy and lasts more than a few months." They often announce recessions long after they start.

Before Trump's latest tariffs were implemented, Goldman Sachs economists increased their recession probability estimate for the US from 35% to 65%. However, they withdrew this prediction after the administration announced a 90-day pause on most tariffs.

Investment Strategies

"Buying the dip" refers to purchasing stocks or entering the market after prices have fallen, aiming to buy at a discount. Retail investors frequently use this strategy. However, predicting market bottoms or recovery durations is nearly impossible.

The yield on the 10-year Treasury note represents the interest rate the US government pays for borrowing over ten years. It's an essential indicator of investor sentiment and economic conditions, influencing loan prices and investment returns. Treasury bonds are considered safe assets globally; thus, investors buy them during uncertain times, lowering yields.

Recently, investors have sold Treasury bonds, causing the benchmark 10-year yield to rise. This could indicate reduced confidence in Treasury bonds or other factors affecting investor behaviour.