Bear Markets and Economic Recessions

Bear Markets and Economic Recessions

Our 29 year of economic growth has now ended (confirmed by Federal Treasurer – Josh Frydenberg) and Australia now lives in a technical recession. But what does that actually mean? What is a Bear market? How does this differ from an economic recession?

To Start – what is the Difference between a Bear Market and an Economic Recession?

Whilst they are similar and they often go hand in hand, they are associated with different drivers.

An Economic Recession can be described as a slowdown in economic output and is generally defined by at least 2 consecutive quarters of decline in Gross Domestic Product (GDP), which forms a measurement of economic health.

A Bear Market can be defined as a stock market decline as a result of negative investor sentiment.

Essentially, the stock market is not the economy, our stock market may be up even if economic output is down.

What can cause a Bear Market?

Causes can vary, however a Bear Market is essentially a result from a crunch to investor confidence – pessimism, fear and uncertainty become drivers of decision making which can be triggered by actual or anticipated weak and/or slowing economy.

  • Rising Unemployment
  • Falling productivity
  • Low consumer confidence
  • Low disposable income
  • Decreasing in corporate profits

Some signs of a slowing economy include:

These signs can prompt investors with a negative outlook about the prospect of future investment returns to sell shares. The market declines as a sell-off gains momentum and pessimism spreads.

What can cause an economic recession?

Again, causes will vary –potential causes can be on the back of poor business performance and consumer confidence in investing and the economy.  Think of a Retail store – lower consumer confidence can mean retail sales slow and retail businesses hire fewer people. This creates a negative feedback loop as businesses cut back in response to lower demand, which again reinforces consumer pessimism.

Other contributing factors include:

  • High Interest Rates
  • Falling Housing prices and sales
  • Credit Crunches
  • Lower consumer discretionary spending
  • Global Pandemic illnesses (COVID-19)

In some cases an economic recession can also be a result of a bear market, this has a  draining effect on business capital. This cause and effect relationship operates in both directions: Under these circumstances investor confidence and stock prices fall in response to a recession. A Bear Market can also drive a recession by putting strain on companies which rely on investor capital.