There are a lot of recession fears nowadays. After the media’s controversial spin about the definition of recession, it looks like we have successfully “avoided” an official recession for now. But you know what? The fundamentals are actually very weak right now. We just had two consecutive quarters of negative GDP reports. A lot of people say this will only get worse, but how will it affect the stock market?
Well, the U.S. economy did grow steadily for a while. The stock market, as a result, went up steadily as well. But what happens when the growth comes to an end? If you are worried about that possibility, then you should know how recession impacts the stock market.
When the economy experiences any kind of slowdown in its growth, there could be repercussions on the stock market. This is because the stocks are linked to the overall performance of the economy. When the economy is doing well, the companies involved in manufacturing and selling goods experience better sales. The increase in demand means more profits, which in turn leads to higher share prices.
However, when the economy slows down, this results in fewer products being sold, thus leading to lower profits. The decrease in profits translates into smaller dividends, which in turn affects the share price negatively.
Since stocks are a type of investment, a drop in their value can lead to investors losing money. Therefore, it is important to know how a recession will affect the stock market so that we can mitigate the risks involved. You always need to make the right investment decision and manage your risks accordingly before you should decide to trade stocks or crypto.
How Recession Will Impact The Stock Market
Let’s look at how the recession will impact the stock market, starting from the most basic level. During a period of economic slowdown, companies might not have enough cash to meet the demands of the consumers. This could mean that they would need to cut down on some of the items produced or services rendered to keep up with the revenue.
Companies almost always try to pass off the increased costs to the customers by raising the prices. However, if the economy does not start growing again soon, these companies may find themselves unable to sustain their current financial position. In such cases, the company may find itself having to reduce the number of employees or even shut down entirely. All of these factors combined will lead to a decline in the number of stocks available in the market, further impacting the share prices.
During times of recession, we expect the unemployment rate to rise, which will translate into decreased spending. Companies are less likely to hire new workers, which in turn results in reduced production. This means that the demand for goods and services will also fall. Even though the economy may recover eventually, it won’t be back to where it was before.
For example, even if the unemployment rate drops to 5%, it still won’t be at the same level as before the recession. So, in order to maintain the same amount of income, the companies will have to increase their prices.
This is why stock market crashes happen during periods of recession. The companies that were once profitable during good economic conditions now become unprofitable during a recession. And since there is no cash flow coming in, they can’t pay the salaries anymore either.
To add to the problem, there is also the risk of bankruptcy, which might force them to close down.
With the incoming recession, can we save the stock market from falling?
If you’ve ever experienced a stock market crash, you would probably agree that it’s not something anyone wants to deal with. There are many reasons behind the stock market crash.
There are also other external factors that influence the stock market, like wars and natural disasters. These events usually result in mass sell-offs of shares across different industries. For example, if a war breaks out between two countries, the stock markets of both countries may drop due to the fear of the loss of life. This is what happened (directly or indirectly) with the war in Ukraine.
Apart from external factors, there are also internal ones. Bad economic performance of a nation can cause the stock market to crash too. Everybody knows the U.S. had just two consecutive quarters of negative GDP reports. This means that the number of jobs available should be lower compared to previous years. A lot of people are now unemployed, and there are also others who are working part-time.
As a result, there is less demand for products and services, and the companies are forced to lay off more staff and/or reduce the hours of operation. These factors will only worsen the situation, meaning that the stock market should continue to plummet, despite the recent market recovery.
But let’s be honest about one thing. Nobody can predict the future and the stock market is mostly rich people’s game (basically, the ones that get least affected by recession fears). They also often talk about how the stock market has been “priced in,” which means they think of the market situation 6-12 months ahead. So, if you see the stock market keep recovering in the months to come, that means the speculators are optimistic about the future of recession.
What Might Happen To The Stock Market Post-Recession?
No matter whether or not we see an official recession this year, the question remains – how will the stock market react? Will it fall further? Let’s take a quick look at the past trends of the stock market.
The first thing to note is that the stock market is very volatile, and not everything will always be “priced in” ahead of time. This makes it difficult to predict the future of the stock market.
However, based on the past data and statistics, it looks like the stock market will continue to follow the path it has been following over the years. If we ever go into an official recession, the stock market should go lower, but eventually, it will recover. If you want a safer bet, maybe you should learn why Apple has become one of the most valuable companies in the world.
The bottom line is that the stock market is extremely unpredictable. No one can guarantee how it is going to evolve in the next few months. However, based on the current trends, we can say that sooner or later, it will go up again. Many rich people are waiting on the sidelines right now.