Understanding the stock market by Chet’la Sebree

Author:Chet’la Sebree
Language: eng
Format: epub
Publisher: Cavendish Square Publishing, LLC
Published: 2019-06-08T00:00:00+00:00

Elements of the economy are interconnected. A slowdown in one business sector, such as the automotive industry, can have a ripple effect on other sectors and lead to a recession.

The more businesses that slow down, the more people are affected throughout the economy at all income levels. It can take months or even years, but the ripple effects of a recession can reach specific regions of the country, the nation at large, and even the world markets.

Recessions and Bubble Bursts

Many things can bring about a recession. However, often it’s the period of expansion itself that indirectly causes an eventual slowdown. All of the companies that are involved in making the goods and services sold to consumers will be doing great. If the companies are public, their stocks will likely be soaring. Their investors will be happy that they are making money. The companies themselves will probably need to hire extra workers to keep up with the extra production needed to meet the increased demand for products and services. Hiring and salaries will probably increase. During a time when people have extra money to spend, they may decide to make “big ticket,” or major, purchases, like a new car or a vacation home.

But how many extra cars and homes can people buy? How long can companies’ stocks soar as people buy these new products? The unusually high demand for a particular good or service is often called a bubble. But what happens to bubbles after a while? They burst. Like any other bubble, goods and services bubbles eventually burst. This means there suddenly won’t be a great demand for the products that people bought in good economic times. The companies will need to produce fewer of these products. As a result, they will not be able to employ as many workers.

Unemployed workers or employees who fear unemployment will drastically cut their spending, resulting in still lower levels of product production, more layoffs, and even less consumer spending. This will cause a downward spiral throughout the economy that keeps worsening as time goes on. As these industries suffer, so do their stock prices.

Recession Management

How do recessions end? Money has to be injected back into the economy through investments, public spending, and greater access to loans and credit. Presidents who lead during economic slowdowns often try to do something to help the economy get back on its feet and start producing again. In an attempt to end the Great Depression, President Franklin Delano Roosevelt introduced the New Deal in the 1930s. The New Deal gave money to people who needed loans. It also introduced massive public spending and construction projects, such as the building of roads, bridges, and government buildings. The projects put many people back to work and eventually brought money back into the economy.

Another way to inject cash back into a stalled economy and stimulate upward movement in the stock market is for the government to give its citizens money to spend as they wish. In 2008, while George W. Bush was president, the US economy entered a major economic downturn called the Great Recession.

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