The economy tends to experience phases of prosperity and recession every so often, and while these waves are expected, they still result in uncertainty and anxiety. Investors and business owners experience similar kinds of financial concerns when recession hits, and these feelings tend to result in reduced investments and lowered expenses, which in turn hinders the economy as a whole.
When there is a threat of recession, war, or other significant event that could influence the economy, many investors find it difficult to invest. With any investment, there is risk involved, but an uncertain future can drastically increase that risk. When a number of cautious investors take their money out of risky stocks and instead put them into more stable assets like precious metals or bonds, the stock market suffers from depreciation.
With recession, the future becomes challenging to predict. The duration and extent of the recession are impossible to predict, and recession makes many company calculations inaccurate due to its unpredictability. When investors feel they may lose money, they change their strategies; in the case of periods of economic insecurity, this behavior can worsen the effects of a recession and cause severe depreciation in the stock market.
Slow Economic Growth
Since the last recession, the economy has experienced better times, but the rate of economic growth is slowing to a point of concern. It is projected that next year’s economic growth will be at its lowest since 2016, which was a period that some consider to be a mini-recession. Along with slow economic growth, individuals responsible for company spending have reported increased reservations, and when companies do not spend money, the economy tends to suffer.
Last year, companies were left with a larger amount of cash due to tax cuts. With that money, they were able to buy their shares back from shareholders; in fact, the amount of money S&P 500 companies put into buybacks exceeded that of any other financial investment. By buying back stock, companies are able to minimize how much its profits are divided, making the company more profitable.
When the future is uncertain, executives tend to hold onto cash in case they need it later. That means they won’t spend nearly as much on buying back their shares. A leading cause of economic stagnation is when individuals and companies keep their money out of the markets, and when this continues for an extended period of time, it can worsen a recession.