Recession: How it affects stock prices?: Finance Trading Times

Recession: How it affects stock prices?

I have gathered some tit-bits about recession. Here is an attempt to explain it in simple terms.

We all have been hearing about recession since last few months. US is on the verge of recession, we will be affected, the UK economy could follow US if the latter gets into recession, and some such concepts.

In this article, I’ll try to explain what is recession, what causes a recession, How do the money markets work in recession, what happens to the stock market in recession, etc.

What is a recession?
The moment the GDP or Gross Domestic Product of a country goes down for a minimum of 2 quarters, the economy may be falling in a recession.

What causes recession?
Speculations by the consumers in that economy, investors at large and the lowering of business confidence causes recession. There are multiple examples of recession causing factors – however, there is no sure shot way to measure it. There are several indices created, like the Business Confidence Index, etc., they try to gauge these parameters. However, they may be highly erroneous. Ultimately, the demand and supply factor comes in, there may be a decrease in industrial production due to loss in demand, and hence job cuts and unemployment. All these factors when become significant, it can be said that economy is in recession.

How do stock markets work in recession period?
Stock markets reflect the economy – so if the economy is expected to be in recession, the stock markets fall. This is what is currently happening in US.

Can an individual fight recession?
Typically, no. Only the government can take measures to bring back the economy on track. Like cutting interest rates, so that people start spending, cut the taxes so that people can have extra money to spend, then trying to create jobs so that people can earn, etc. Ultimately, the more free flow of money is there, the better the chances of coming out of recession. Recession can never be predicted. People & organizations perceive it coming and they start taking measure to act in that manner. That is what is happening in the US currently. Recession is not officially declared, it is an expectation. Hence, since the markets are efficient, measures are already being taken to counteract it. That is causing the US stock markets to fall.
For an individual, one can only rely on savings for bad times. Relying on your stock holdings can be very risky, as the share prices may fall down significantly.
If you have savings, then you can think of buying a cheaper house during recession. Basically, in recession, one attempts to go against the trend. Table of Contents
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1 Comment: Post your Comments

Anonymous said...(on 16 February 2008 at 04:14 )  

Thanks
As you said US market are falling but total market fall from its peak (DOW jones) just 2000points. It can be considered as regular up & down of market. If recession has to come then market should have fall much below this fig. I am beginer to market but I am just guessing logically. Also last week on wednesday Mr. Ben (fed chief) said USA may see recession and on thursday he said There is no recession. So it is confusing whether Recession is on its way or it will be effectively managed by fed?
Can you throw some light on this?
Thanks,

Mangesh

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