Buoyant

What Is Buoyant?

Buoyant is a term used to describe a commodities or equity market where the prices are generally rising and when there are considerable signals of strength. These markets have comparative features to bull markets, albeit a buoyant market may not necessarily last as long. After the 2008 market crash, for example, the equity market became buoyant and hit an all-time high just seven years later.

Understanding Buoyant

A buoyant market is one that displays prices that gradually trend upward over time. A market that displays lightness or becomes buoyant normally happens as a result of optimism regarding the economy, which generates positive economic activity. It becomes a self-satisfying prophecy of sorts, wherein people begin to regain confidence after a down market and increase investment, consumption, and savings.

These factors drive the prices of the securities, like commodities and equities, higher. People view this as a positive sign and begin to generate more economic activity, further increasing prices.

Buoyant markets usually display characteristics of high corporate profits, low cost of capital, and a high return on capital. Markets that are considered to be buoyant have strong underlying performance, specifically higher-than-average corporate price-to-earnings ratios (P/E ratio) and profit margins.

Price-to-Earnings Ratios in a Buoyant Market

When an equity market displays an average P/E ratio that is high, it is normally due to the way that corporate earnings are forecast to develop, the cost of capital is expected to decline, and the returns on capital are assumed to increase in the near term. Additionally, the more corporate profits that are earned, the higher the average cash close by of public companies, increasing P/E ratios.

All of these underlying factors work to increase the average P/E ratios and help float the market, and consequently they increase prices. However, inflated P/E ratios might signal that the market is overvalued, and investors ought to be objective in their assessment. An investor who enters the market toward the beginning of a buoyant period is set to profit, while an investor long position toward the end of a buoyant market might realize losses.

Profit Margins in a Buoyant Market

Assuming a buoyant market is one with increasing prices, it's a good idea that a market that displays lightness will have higher corporate profits, and therefore, higher profit margins. Increased profit margins will lead to more cash close by, which will increase average P/E ratios and further signal a buoyant market.

However, the profit margins ought to be looked at on a sector by sector basis. Because numerous sectors and industries could have declining profit margins, the average margin for the overall market might be held up by a few sectors with massive growth in margins. This makes it seem to be the average margins in the market are increasing. Investors ought to consider margins as only one part of their investment process.

Highlights

• Buoyant markets have comparable features to bull markets, despite the fact that they may not necessarily last as long.
• Buoyant is a term used to describe a market where the prices generally rise easily when there are considerable signals of strength.
• Buoyant markets usually display characteristics of high corporate profits, low cost of capital, and a high return on capital.