You always hear the connection between recessions and stock markets. I understand a recession would trigger the stock market to plunge. But I don’t understand why and I also don’t understand the timeline of events of a recession and what’s happening with the U.S. economy overall during a recession.
In: Economics
The stock market tells you how much large corporations are worth. In theory, corporations are worth a lot more money when they’re projected to make a lot of money. So if the stock market goes down, that’s a sign that people are anticipating corporations to not make as much money.
A “recession” is just a term for an economic downtown, traditionally associated with a decline in GDP. The Gross Domestic Product just refers to how much money is moving throughout the economy. People buying and selling things, making deals, money changing hands, etc.
So you can see how stock prices and GDP go hand in hand, even if they’re measuring different things. Generally speaking, if companies are making a lot of profit it’s because they’re doing a lot of business. If everyone’s doing a lot of business, then the GDP is high.
That’s the connection.
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