what happens to the stock market during a recession
What happens to the stock market during a recession?
Usually, the stock market falls during a recession because investors expect lower corporate profits, weaker consumer spending, and more economic uncertainty. But it does not move in a straight line, and it can start recovering before the recession officially ends.
[1][6]Quick scoop
In plain terms: recessions often bring volatility, selloffs, and lower valuations, but the market’s performance varies a lot by recession. Historical research shows that in 16 of 31 U.S. recessions since 1869, stock- market returns were actually positive from the start to the end of the recession.
[6]Why stocks drop
- Corporate earnings usually weaken. When people spend less, many companies make less money, which can push stock prices down. [10][1]
- Fear rises. Investors often sell risky assets when the economy looks worse, which can amplify declines. [9][1]
- Credit gets tighter. Banks may lend less, making it harder for companies to grow and support earnings. [1]
What history shows
The market does not always collapse just because a recession happens. Russell Investments reports that across 31 U.S. recessions, the average relationship between GDP changes and stock returns is weak overall, and excluding 2020 the correlation is near zero.
[6]That said, severe recessions can hit stocks hard. The 2008 financial crisis saw major equity declines, and the 2020 recession brought a sharp but relatively brief drop followed by a strong rebound.
[1][6]What investors often notice
- Stocks may fall before the recession is officially recognized.
- Defensive sectors often hold up better than cyclical sectors.
- Central banks may cut interest rates, which can eventually help stocks recover.
- Long-term investors sometimes benefit by staying invested through the downturn. [6]
Bottom line
A recession usually pressures the stock market downward, but the size and timing of the move depend on how deep the recession is and how markets anticipate it. In many cases, the market bottoms out before the economy does.
[1][6]| What people expect | What history often shows |
|---|---|
| Stocks always crash in a recession | Not always; many recessions have had positive stock returns | [6]
| The market recovers only after the recession ends | Markets often recover earlier | [1][6]
| All sectors fall equally | Some sectors usually hold up better than others | [10]
TL;DR: Recessions usually bring stock- market weakness and volatility, but the market can rebound before the economy does, and not every recession causes a long bear market.
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