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
Take a lemonade stand. The stock market represents the money required to get it set up and running and represents the ownership of the stand. It may the kid’s allowance, the parents’ money, or some combination therein. They obviously set it up hoping the kid will turn a profit
The economy is all the ongoing spending and income. It measures the costs of the lemons, sugar, water, the implicit cost of the time of the kid running it, and the money collected from customers.
In a recession, spending drops all around. Fewer customers buy the lemonade, so the kid buys fewer lemons and sugar packets. It can create a vicious cycle if the lemon groves and sugar farms/processors cut back on operations in response to fewer sales on their end, leading to their employees having less money, meaning they may buy even fewer cups of lemonade, and so on and so forth until the only spending that’s left is what’s necessary to survive, potentially meaning the lemonade stand has 0 customers.
The “value” of the lemonade stand similarly drops. If it was making $20/day pre-recession and is now only making $15/day, ownership in that stand is less valuable, all else being equal. If the next door neighbor wanted to buy out the stand and take it over herself, she would pay less than she would have pre-recession, because it’s making $5 less per day and presumably the kid and/or the parents would be willing to accept less.
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