Why do stocks drop during a recession?
Where does the money go in favor of these assets?
Or is the first question not true?
Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It only takes a minute to sign up.Sign up to join this community
During a recession, economic growth slows. This can lead to higher unemployment which in turn results in lower consumer and company spending which in turn leads to decreased company revenue and profit, lowering the fundamental value of stocks.
Lower investor confidence contributes to market decline as investors move to safer assets (defensive stocks, bonds, certificates of deposit, money market accounts). Some people, particularly the newly unemployed, pull money out of the market just to meet basic needs.
As for "where does the money go", the fact that a stock price goes down doesn't mean money is going anywhere.
E.g. if a stock is first priced at $100, but then some shares are traded between investors at a price $90, then that is the new value of the stock. But only some shares now have a new owner, and no money left.
The stock market is a market.
When there's a lot of money in a market, and everyone is competing to buy a limited number of stock shares, demand is high and prices tend to go up.
However in a recession there is job loss so people have less to spend, people with jobs are catching up their emergency funds instead of investing, people are competing to sell the shares they have to fund life needs, and there are fewer buyers to meet the supply. That tends to drive prices down.
One reason I haven't seen mentioned is that if an individual loses their job, they might need to sell some stocks they hold to make ends meet. That will add to the number of sellers or the supply of stocks lowering prices.
To sum up, the following are all reasons why stock prices will fall: