What is a Rebound?

A rebound in the stock market is like a rebound in basketball…

When a basketball player shoots the ball and misses, it often bounces back off the rim or backboard. Despite not getting the points on that shot, players have a chance to grab the ball and try again. The stock market also gets second chances. Even after a downturn in the market, there may be a subsequent rebound.

A rebound is an event that takes place in the stock market where prices begin to increase again after a previous downturn. Rebounds can take place for the market as a whole, as indicated by the S&P 500, or by certain segments of the market, such as technology or energy stocks. A rebound can also take place for a single company that’s experienced declining stock prices and now is experiencing an uptick.

The stock market has rebounded from every downturn in history so far. One of the clearest examples of the stock market’s ability to bounce back is the rebound that occurred after the infamous 1929 stock market crash that came before the Great Depression. In the years leading up to 1929, stock prices increased dramatically, despite other parts of the economy beginning to suffer. This series of events resulted in a stock market crash that lasted four days, beginning on Black Thursday and ending on Black Tuesday.

While October 29, 1929, was the day the stock market crashed, the market continued to fall for the next several years before finally bottoming out in 1932. But after that market low, the market began to rebound very slowly. Overall, analysts suggest it took more than 25 years for the market to fully recover from the crash.

Historically, the United States has rebounded from every economic downturn it has faced to date.

The stock market goes through what is referred to as the business cycle. This cycle is the natural ebb and flow that occurs over time. The business cycle has four phases:

Peak: When the economy is doing well, it eventually reaches a peak. This is the highest point in the cycle. A peak generally occurs at a time of high employment, high economic output, and rising inflation.

Contraction: After the peak, there comes a contraction. During this phase, economic growth slows or reverses and unemployment begins to rise. The stock market often enters a bear market, which is a period of sustained declining stock prices. Depending on how long the contraction lasts, it may be considered a recession.

Trough: After the contraction, the economy eventually hits a trough. The trough is the rock bottom — It goes up from here.

Rebound: Finally, after hitting rock bottom, the economy enters a rebound (aka expansion). This phase represents a period of economic growth. Unemployment starts to level out as businesses begin hiring. The stock market turns around and stock prices rise. The gross domestic product (GDP), meaning the value of all goods and services produced in a country, begins to increase.

The economy has gone through this exact cycle for years and years. While each version of the cycle looks a bit different (some contractions are worse than others, while some rebounds are better), the cycle always continues.

Stock prices are constantly changing. Prices might start high one day and fall midday, only to end up exactly where they started. In other cases, trends might stick around a bit longer. Changes in stock prices can vary for many reasons, including newsworthy events within a specific company or national news.

But what causes the stock market to rebound after a period of economic downturn?

First, monetary policy can help the market to bounce back. Monetary policy is a tool that the Federal Reserve (aka the Central Bank) uses to help control economic growth, inflation, and unemployment. One of the tools at the disposal of the Fed is the federal funds rate. The bank can enact monetary policy to increase or decrease this rate, which increases or decreases the interest rate at which consumers can borrow money. The easier it is for people and businesses to borrow money, the more companies are likely to likely invest and more likely for people to spend. As people spend money, the economy, and therefore the stock market, grows.

Other types of government policy can also impact the stock market and cause a rebound. For example, during the COVID-19 outbreak, Congress and President Donald Trump passed and signed a bill to give a $1,200 stimulus check to every American under a certain income level. Not only did many people spend that money, which helps stimulate the economy, but many also used that $1,200 to invest in the stock market, helping stock prices rise.

Rebounds are often a result of what analysts and investors predict will happen in the future — In other words, it can be a bit of a self-fulfilling prophecy. At some point during an economic downturn, people start to see the light at the end of the tunnel. And when investors think the market will bounce back, they buy more stock in the hopes of profiting off the rebound. This uptick in trading helps stock prices rise.

Finally, much of what happens in the stock market is a result of its cyclical nature. A market that contracts, rebounds eventually.

In the first quarter of 2020, the stock market experienced a drastic downturn, which coincided with the worldwide COVID-19 outbreak. The coronavirus pandemic caused uncertainty in the markets, as well as massive unemployment spikes. But within a few months, even as COVID-19 cases and unemployment increased, the stock market began to rebound.

So why did the stock market begin to rebound when so many people were out of work?

First, it’s unlikely the rebound had much to do with the state of the U.S. economy at the time. Experts speculate that it had more to do with what investors expected to happen once the pandemic had passed. Even when unemployment was at its peak, analysts expected the economy would bounce back quickly when the nation began to reopen.

Another potential reason for the rebound is monetary policy. One of the primary jobs of the Federal Reserve is to enact monetary policy, which is a tool they use to help control the economy. Shortly after the market downturn, the Fed responded by printing new money to buy corporate and government debt securities. Because this move decreased bond prices, investors may have chosen instead to put their money in the stock market. The increase in buying pushed stock prices up.

Another reason the stock market bounced back fairly quickly could be a result of the investments that went into medical advancement. Both companies and the government are determined to roll out a vaccine as quickly as possible. As a result, several vaccine candidates are at various stages in the testing process. Analysts expect the vaccine to be available sooner rather than later, which they hope will bring the unemployment numbers back in check.