Posthaste: Beware the dead cat bounce as Trump tariff chaos sets the stage for 'vicious bear market rallies'
Stock markets rebounded Tuesday morning, but the subsequent decline into yet another day in the red fits in with analyst warnings about “dead cat bounces.”
These occur when a market temporarily reverses course from a consistent decline or a bear market, only to continue on a downtrend.
For example, markets on Wall Street and in Toronto rose Tuesday morning, but those gains were completely wiped out by the end of the day, continuing the fall into correction territory on the heels of United States President Donald Trump announcing reciprocal tariffs on countries around the world.
“Vicious bear market rallies are the order of the day. They are referred to as ‘dead cat bounces,'” David Rosenberg , founder of Rosenberg Research & Associates Inc. , said in a note on Tuesday. “There are grounds to believe that the lows are in right now, but those odds are rather slim — just enough to dip two toes into the market, but not two feet.”
He said breaks from a downturn are “rather common,” so the trick for investors is to figure out when markets have hit a “fundamental low that typically have a real catalyst behind them.”
Rosenberg doesn’t think that catalyst has arrived. He said there is plenty of negative data swirling around to drag down markets even further, including a drop in U.S. non-mortgage household debt in February, which had a “recession undertone” to it.
He also pointed to the rise of the Chicago Board Options Exchange VIX — a.k.a. the fear index — which has reached levels similar to those recorded during the great financial crisis.
“Markets, at the end of the day, don’t like uncertainty. There’s just so much uncertainty right now,” Rebecca Teltscher, a portfolio manager at Newhaven Asset Management Inc., said in an interview with the Financial Post’s Larysa Harapyn, adding that investors could be “grasping at the hope that there could be some kind of tariff negotiations , but we have yet to see any of that come to fruition.”
The U.S. has reportedly held talks with South Korea and Japan regarding the reciprocal tariff regime, which is scheduled to come into full force on April 9.
But Trump on Tuesday upped the ante against China pledging to hike tariffs against many exports to the U.S. by another 50 per cent, taking the total tariff to 104 per cent.
For now, Teltscher said her company is staying conservative by buying names it already owns, but “we’re not going to try to capitulate; we’re not going to try to speculate on a market that is still very uncertain.”
JPMorgan Chase & Co. ‘s global equity strategy analysts also warned this is a tricky time for investors since the odds of a “tactical squeeze are high.”
A tactical squeeze occurs when the price of a stock suddenly rises, forcing short sellers, who bet against the stock, to purchase more of the stock, which then lifts its price.
More broadly, JPMorgan analysts warned that the market’s fate lies with one person “who can unilaterally ease or deepen this shock — the range of outcomes for risk assets globally is abnormally wide and binary.”
Currently, JPMorgan is calling for the U.S. to fall into a recession in 2025.
Given the uncertainty around where tariffs are headed, its analysts laid out three tariff and market scenarios for the S&P 500.
In their bear case, they estimate full tariffs will result in the S&P 500 falling to around 4,000, about 1,000 points off Tuesday’s close. Their base case of partial tariffs calls for the S&P 500 to close out the year at 5,200, while their bull case calls for 5,800.
“Looking further out, the range of outcomes remains very wide and highly dependent on trade policy direction ,” the analysts said.
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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.
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