What happens to the economy if the stock market crashes?
Stock market crashes have led to economic recessions.
In the case of a bear market or a fall in stock prices, there is a negative wealth effect. It creates an environment of uncertainty among consumers and a fall in the value of their investment portfolios decreases spending on goods and services.
There is nothing that will definitely go up if the stock market crashes. Interest bearing investments such as money market funds will continue to earn interest. Bonds may hold their value or increase, and individual bonds including Treasurys will continue to earn interest.
If companies issue new shares of stock to raise capital, they can use those funds to expand operations, invest in new projects, and hire more workers. All of these activities boost GDP.
While the stock market will generally decline during a recession, there are always going to be some companies that perform well. This is why it's so important to have a diversified portfolio – because even if some of your stocks are taking a hit, others may be doing just fine.
Economic collapse could lead to a full-scale depression—few jobs and little pay. While there are many examples of an economic depression, the collapse of the Soviet Union in the 1990s highlights what an economic collapse could mean. Poverty in the Post Soviet States increased 10x.
The largest single-day percentage declines for the S&P 500 and Dow Jones Industrial Average both occurred on Oct. 19, 1987 with the S&P 500 falling by 20.5 percent and the Dow falling by 22.6 percent. Two of the four largest percentage declines for the Dow occurred on consecutive days — Oct. 28 and 29 in 1929.
Few would dispute that the crash of 1929 was the worst in history. Not only did it produce the largest stock market decline; it also contributed to the Great Depression, an economic crisis that consumed virtually the entire decade of the 1930s.
The stock market functions as a kind of economic barometer, reflecting opinions on which direction big wealthy investors think the economy is heading.
The key point to remember is that the stock market is not the economy, but instead, a leading indicator of where investors think the economy will go.
Do stock prices lead the economy?
Instead, it represents investor confidence in the direction of the economy. In that sense, the stock market is a leading economic indicator. The stock market can impact the overall economy, as businesses and investors may adjust their spending based on the health of the stock market.
For investors, “cash is king during a recession” sums up the advantages of keeping liquid assets on hand when the economy turns south. From weathering rough markets to going all-in on discounted investments, investors can leverage cash to improve their financial positions.
Investors seeking stability in a recession often turn to investment-grade bonds. These are debt securities issued by financially strong corporations or government entities. They offer regular interest payments and a smaller risk of default, relative to bonds with lower ratings.
Yes, cash can be a good investment in the short term, since many recessions often don't last too long. Cash gives you a lot of options.
A complete economic collapse is characterized by hyperinflation, high unemployment rates, and societal breakdown.
Items To Barter With
Many investors will find value in having items that can be used as a means of barter. Such investments might include food, water, and fuel. While it's unlikely that we'll ever end up using a bartering system like in the olden days, it's still a good idea to have some items on hand, just in case.
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
"There's a solid chance that we see renewed weakness in the economic and earnings numbers as we move through 2024. The deepest concern is that the inflation numbers have started to renew their move higher." Bodenmiller agrees with that sentiment. "Inflation data continues to be a major market catalyst," he says.
President Calvin Coolidge, who took office in 1923, whose stock price performance change was a whopping 208.52%, for an average monthly return of 1.74%. That's the largest for any president since the start of the 20th century.
Though the economy occasionally sputtered in 2022, it has certainly been resilient — and now, in the first quarter of 2024, the U.S. is still not currently in a recession, according to a traditional definition.
What does S & P stand for?
Standard & Poor's (S&P) is a company well known around the world as a creator of financial market indices—widely used as investment benchmarks—a data source, and an issuer of credit ratings for companies and debt obligations. It's perhaps best-known for the popular and often-cited S&P 500 Index.
S&P 500 Index
But the early days of 2024 swept away this uncertainty as the S&P 500 reached its highest level ever, signaling we've been in bull territory for quite a while -- since the index started rebounding from its bear market low in late 2022.
Economic downturns hurt the optimistic bullish investors but reward the pessimistic bearish investors. Several individuals who bet against or “shorted” the market became rich or richer. Percy Rockefeller, William Danforth, and Joseph P. Kennedy made millions shorting stocks at this time.
The key is not to put literally all your money in stocks. Outside of your investment portfolio, you should have an emergency fund with enough to cover at least three months of expenses, as well as savings for any short-term goals and large future expenses you need to plan for.
A nation without a stock market could see more even income levels between the upper and the middle class. However, the overall economy might not be as strong, and many of our major corporations would not exist, at least not as we know them.
