Hi Ben,

That’s a great point and I’ll see where I can work it in. Here’s a brief overview of the factors at play though. A recession can ultimately have a positive result due to the forward looking nature of markets and the suppressive risks of uncertainty.

  1. The markets are forward looking which means falls in earnings are often priced in well before they actually occur. The recent earnings season was a good example of this, where companies produced strong earnings but prices went down as the market didn’t see these earnings being reproduced in the future. Similarly, although there may be an economic contraction the market can view it as short lived and with significant growth on the other side which then gets priced in.
  2. The other factor is uncertainty. Where there is a significant amount of uncertainty there are nerves, and nerves mean people sell out. The appearance of a recession will put an end to any uncertainty and risks of the unknown, or worries of when. As that fear abates, market participants will look to ‘buy the dip’ and capitalise on the prospects of future growth.

These two factors don’t mean that prices won’t initially fall but they do highlight why a negative economic event can create positive market outcomes.

Thanks,

Chris

Bringing finance and economics to you with a focus on in-depth analysis and everyday life.

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store