The stock market has always faced severe crashes during periods of inflation and recession; such that many today find it difficult to tell which of the duo is the better poison attacking the prices of stock when they occur. While inflation tends to last longer than a recession, the latter has been perceived as the greatest killer of the stock market. This work will help us understand the reasons why many analysts have reached this conclusion today.
Meaning of Inflation
Inflation is the devaluation of a country’s currency as a result of having so much of its currency in circulation. When there is so much money chasing limited goods and services in the market, the natural result is a massive rise in the prices of goods and services.
What is a recession?
A recession is a period of economic backwardness when the country’s productivity rate is significantly reduced resulting in having a series of negative Gross Domestic Product (GDP) say two to three quarters. This period is marked by severe hardship with lots of people losing their jobs. Many industries suffer a severe clampdown on production too.
Understanding the stock market
The stock market is a well-organized and regulated market for buying and selling stocks. This market connects individuals to companies seeking investors to support them by buying the company’s shares. When an individual invests in a company’s share, he becomes eligible to receive dividends from the company and also contributes towards the company’s progress.
The advent of stock brokers has made stock trading easier for individuals today. Hence, the trader no longer needs to go directly to the stock market to buy stocks after he registers with these stock brokers; who takes the task of doing so on his behalf.
How does inflation affect the stock market?
One way in which inflation affects the stock market is that it leads to tightening the monetary policy by hiking the interest rate. Hiking the interest rate often caused investors to withdraw from risky assets including stocks and to seek refuge in the safe-havens such as bonds, and other strong currencies with higher interest rates.
What impacts does recession have on the stock market?
Generally, a recession impacts the stock market negatively. During this period, many companies are unable to continue with their production due to severe economic downturns. The weak stocks crash rapidly resulting in a big loss for investors.
Inflation or recession which would be the fastest killer of the stock market?
Inflation and recession have been the two great killers of the stock market from time immemorial. Each had exerted strong negative influence on the stock market at varying degrees.
However, judging from the historical records on how these two have affected the stock market in the past, inflation appears to be a slower killer compared to a recession which has proved to be the fastest killer of the stock market.
The greatest downturn in the stock market has been recorded during the period of recession. It is therefore not surprising to discover that the worst performance ever since the history of the stock market was recorded during the great recession which took place from December 2007 and lasted up to 2009. During this period, the S&P 500 which measures the average performance of the stock market lost more than 50% of its value. This is more harsh compared to the crash witnessed in the stock market in 2022 where the S&P 500 lost only 21% of its value as a result of global inflation.
