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What Happens to the Stock Market During a Recession
Mar 26, 2025

Consider you’ve been diligently saving for retirement and watching your nest egg grow over the years. You’re in a good place—until the economy starts to slow down and talk of a recession ramps up. Suddenly, you’re hearing news reports about what happens to the stock market during a downturn, and you can’t help but wonder what this means for your future.
Will the stock market crash and take your retirement savings with it? Understanding how the stock market reacts during recessions can help ease your fears. This guide explores what happens to the stock market during a downturn, so you know what to expect if a recession occurs. GoMoon's AI-powered economic calendar can help you prepare for upcoming downturns and their effect on the economy and the stock market. This tool can provide timely information about financial events that may signal a recession is approaching, so you can get ready before any possible market volatility impacts your investments.
Table of Contents
10 Stock Market Behaviors to Watch Out for During a Recession (Extremely Detailed Explanation)
How Investors and Traders React to a Recessionary Stock Market
What Is a Recession and How It Impacts Financial Markets

Recession: What to Expect and How to Prepare
A recession is generally defined as negative economic growth lasting for two consecutive quarters or longer. However, many economists and institutions (such as the National Bureau of Economic Research (NBER) in the U.S.) define a recession more broadly as a significant decline in economic activity spread across multiple sectors of the economy.
Key Features of a Recession
Falling GDP (Gross Domestic Product): The total value of goods and services produced in an economy declines.
Rising Unemployment: Businesses cut jobs to manage costs, leading to lower household incomes.
Declining Consumer Spending: People reduce discretionary purchases, impacting retail, entertainment, and luxury goods.
Lower Business Investment: Companies postpone expansion, hiring, and capital expenditures.
Stock Market Instability: Financial markets experience heightened volatility as investors react to economic uncertainty.
Although every recession is different, they tend to follow a predictable pattern where economic growth slows, financial markets decline, and governments attempt to intervene through policy measures.
The Causes of a Recession
Recessions are triggered by various economic, financial, and external shocks that weaken overall demand and disrupt economic stability. Some of the most common causes include:
1. Tightening Monetary Policy (High Interest Rates)
Central banks, such as the Federal Reserve (U.S.), European Central Bank (ECB), or Bank of England (BoE), raise interest rates to control inflation. Higher interest rates increase borrowing costs, making it more expensive for consumers and businesses to take out loans. Slower borrowing leads to lower spending, weaker business growth, and reduced corporate profits. Stock market impact: Higher rates reduce corporate earnings expectations, causing stock prices to fall. Example: The 2008 Financial Crisis was worsened by the Federal Reserve raising interest rates from 1% to 5.25% between 2004 and 2006, tightening liquidity in financial markets.
2. Inflationary Pressures Reducing Purchasing Power
Inflation occurs when prices of goods and services rise too quickly, reducing consumers’ ability to spend. If wages do not keep up with inflation, households cut discretionary spending, leading to lower demand for goods and services. Central banks respond by raising interest rates, which can slow business growth and job creation. Example: The 1970s Stagflation Crisis in the U.S. saw inflation reach over 14%, pushing the economy into a recession as consumers struggled with rising prices and stagnant wages.
3. Stock Market Bubbles and Financial Crises
Speculative bubbles form when asset prices become detached from real economic fundamentals. When these bubbles burst, investors panic, causing massive selloffs, financial instability, and liquidity crises. Market collapses can trigger a domino effect in the broader economy, leading to lower business confidence, job losses, and bank failures. Example: The Dot-Com Bubble Burst (2000-2002) saw technology stocks plummet after years of overvaluation, erasing trillions in market value and contributing to a global economic slowdown. The 2008 Financial Crisis was caused by the collapse of the U.S. housing market, where excessive mortgage lending and speculation led to a banking meltdown.
4. External Shocks (Wars, Pandemics, Trade Wars, Supply Chain Disruptions)
Wars, natural disasters, pandemics, or geopolitical tensions can disrupt global trade and economic stability. If businesses face supply shortages, reduced demand, or logistical challenges, GDP declines, and unemployment rises. Example: The COVID-19 Recession (2020) was triggered by global lockdowns that halted economic activity across multiple industries, leading to the fastest stock market crash in history. The oil crisis of 1973 caused a severe recession after OPEC’s oil embargo, which led to soaring energy prices and reduced economic output.
Why Financial Markets React Sharply to Recessions
1. Investor Uncertainty and Risk Aversion
During recessions, investor confidence collapses as businesses struggle and economic forecasts turn negative. Investors reduce exposure to riskier assets (like stocks) and shift toward safe-haven investments (like bonds, gold, and the U.S. dollar). This flight to safety causes massive stock market sell-offs, leading to bear markets.
2. Declining Corporate Profits and Earnings Reports
When the economy slows, companies sell fewer products and services, leading to lower revenue and weaker earnings reports. Investors anticipate this and start trading stocks ahead of bad earnings announcements, further accelerating stock market declines. Example: During the 2008 crisis, companies in sectors like real estate, banking, and retail saw their stock values plummet by over 50% due to poor earnings.
3. Volatility Surges as Traders Adjust Positions
Market participants react to recession news by adjusting portfolios, creating sharp spikes in volatility. The VIX (Volatility Index), known as the “fear gauge,” typically surges during recessions, reflecting market uncertainty. Example: The VIX hit record highs of 80+ during the COVID-19 crash in March 2020, as investors scrambled to exit equities.
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10 Stock Market Behaviors to Watch Out for During a Recession (Extremely Detailed Explanation)

1. High Volatility Becomes the Norm
As economic uncertainty mounts, market participants struggle to price assets correctly. Traders react emotionally to financial reports, job data, and corporate earnings. Institutional investors frequently rebalance portfolios, causing sharp market swings. The VIX (Volatility Index)—often called the “fear gauge”—spikes to higher-than-normal levels. During the COVID-19 crash (March 2020), the S&P 500 fell 34% in one month, triggering multiple circuit breakers (temporary halts on trading). Use wider stop-losses to avoid being shaken out by random price swings. Look for volatility compression after significant moves—it often signals trend reversals. Use GoMoon.ai to track event-driven volatility and identify historical patterns.
2. Bear Markets Develop As Investors Sell Risky Assets
Fear of prolonged economic contraction causes investors to exit stocks. A bear market is a 20% or more stock market decline from recent highs. Valuations shrink as corporate earnings deteriorate. In the 2008 financial crisis, the S&P 500 dropped over 50% from its peak before finding a bottom in 2009. Avoid catching falling knives—wait for confirmed trend reversals before buying dips. Shift focus to short-term trades or hedged positions until stability returns. Track historical bear market durations using GoMoon.ai’s replay tools.
3. Defensive Sectors Outperform As Investors Seek Stability
Investors rotate money out of high-risk growth stocks and into stable, dividend-paying companies. Defensive sectors include healthcare, utilities, consumer staples, and gold mining stocks. While financial stocks collapsed, Procter & Gamble (PG) and Johnson & Johnson (JNJ) saw strong performance during the 2008 crisis. Shift allocations toward recession-proof stocks and ETFs that hold up in downturns. Use GoMoon.ai’s sector rotation analysis to see where capital is flowing.
4. Growth and Tech Stocks Suffer the Most
Companies that rely on cheap borrowing (low interest rates) struggle when monetary policy tightens. Tech firms with high price-to-earnings (P/E) ratios get hit hardest. During the 2022 inflation-driven downturn, the Nasdaq lost over 30%, with stocks like Tesla and Meta plunging. Wait for valuation resets before jumping back into growth stocks. Watch for interest rate pivots—growth stocks recover first when rates decline.
5. Corporate Earnings Fall, Dragging Markets Lower
Companies struggle with lower sales, supply chain disruptions, and rising costs in recessions. Wall Street downgrades earnings estimates, triggering further stock declines. Tech companies posted massive losses after the dot-com bubble burst, deepening the bear market. Track earnings season closely—a better-than-expected report can signal a bottom. Look for companies with strong balance sheets and minimal debt.
6. Dividends Get Cut to Preserve Cash
Companies protect cash flow by cutting or suspending dividend payments. Income investors flee dividend stocks when payouts are slashed. Ford and General Motors cut their dividends entirely during the 2008 recession. Focus on high-quality dividend stocks with long histories of payouts. Avoid companies with high dividend yields that may not be sustainable.
7. Central Banks Step In With Stimulus Measures
Governments and central banks try to stop economic free-falls with interest rate cuts and stimulus packages. Stock markets often rally sharply when stimulus is announced. The Federal Reserve slashed rates to near zero in 2020, triggering a historic stock market rebound. Watch for monetary policy pivots, as they often signal market bottoms. Use GoMoon.ai’s central bank tracking feature to stay ahead of policy changes.
8. Massive Short-Selling Leads to Bear Market Rallies
Short-sellers bet against the market, driving stocks lower. Periodic short squeezes cause rapid rallies within bear markets. In 2008, the S&P 500 experienced multiple 10%+ rallies even as it trended lower. Trade short squeezes with quick profit-taking strategies. Avoid assuming short-term rallies mean the recession is over.
9. Stock Buybacks Decline As Companies Preserve Capital
During recessions, companies pause stock buybacks to conserve cash. Fewer buybacks reduce market support, leading to deeper drawdowns. S&P 500 buybacks fell over 50% during the 2020 crash, worsening the sell-off. Avoid stocks that relied on buybacks for earnings-per-share (EPS) growth. Look for firms still repurchasing shares, as they often have strong balance sheets.
10. Smart Money Starts Accumulating Before the Recession Ends
Institutional investors quietly buy quality stocks at discounted prices before the market recovers. By the time the recession ends, stocks are already moving higher. Warren Buffett bought heavily during the 2008 crisis, making billions when markets recovered. Use GoMoon.ai’s historical analysis to spot early accumulation patterns. Follow insider buying trends—corporate executives often buy at market bottoms.
GoMoon: The Smarter Way to Track Economic Events
GoMoon transforms economic calendar data with AI-powered insights for smarter trading decisions. Our platform analyzes global events and rates their market impact on a scale of 1 to 10, helping you understand how they'll affect various assets. We've packed everything traders need: live economic event streaming, custom notifications, and historical event replay with TradingView charts. What sets us apart is our comprehensive approach to event analysis.
Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon clarifies the complex world of economic events for traders seeking data-driven decisions. Get started for free to get AI-powered economic insights today.
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How Investors and Traders React to a Recessionary Stock Market

1. Institutional Investors Reduce Risk and Rotate Into Defensive Assets
Who they are
Institutional investors include pension funds, mutual funds, sovereign wealth funds, and large asset management firms like BlackRock and Vanguard.
How they react
Sell high-risk assets and rotate into low-volatility, stable sectors such as:
Healthcare (Pfizer, Johnson & Johnson)
Consumer staples (Procter & Gamble, Coca-Cola)
Utilities (Duke Energy, NextEra Energy)
Increase holdings in government bonds and dividend-paying stocks to ensure steady income. Avoid high-beta stocks, which tend to fall the hardest in recessions. Gradually accumulate undervalued assets at deep discounts to prepare for the recovery.
Example
In the 2008 financial crisis, institutional investors dumped financial and tech stocks but rotated into healthcare, utilities, and gold.
In 2022, rising inflation saw institutions exit tech stocks like Tesla in favor of defensive names like Berkshire Hathaway and Costco.
What traders should do
Track institutional flow data to see which sectors big money is moving into.
Avoid stocks that lack earnings stability and are reliant on speculative growth.
Use GoMoon.ai’s sector rotation insights to monitor institutional buying trends in real time.
2. Retail Investors Panic Sell and Exit the Market
Who they are
Retail investors include individual traders who lack access to insider information or institutional-grade analysis.
How they react
Sell stocks in a panic, often after major losses.
React emotionally to news headlines rather than analyzing macroeconomic trends.
Buy high and sell low—a classic mistake driven by fear and lack of discipline.
Move money into cash savings, stablecoins (in crypto), or gold for safety.
Example
During the 2020 COVID-19 crash, millions of retail investors sold stocks at the bottom, only to watch the market recover rapidly.
In 2022, crypto retail traders panic-sold Bitcoin below $20,000, while institutions quietly accumulated.
What traders should do
Use GoMoon.ai’s event tracking to identify market-wide retail panic and avoid emotionally driven trades.
Follow smart money movements instead of reacting to retail-driven market swings.
Look for oversold opportunities in quality stocks that retail investors dump in panic.
3. Hedge Funds Short Sell Stocks and Increase Volatility
Who they are
Hedge funds are professional trading firms that profit from market trends by using leverage, options, and algorithmic trading.
How they react
Short sell overvalued or vulnerable stocks, profiting as prices drop.
Increase put option purchases as a hedge against further declines.
Use high-frequency trading (HFT) algorithms to exploit short-term volatility.
Place contrarian bets—buying stocks before retail traders realize the worst is over.
Example
In 2008, hedge funds shorted bank stocks, making billions before the market collapse.
In 2021, hedge funds were caught in the GameStop short squeeze, losing billions as retail traders forced them to cover their positions.
What traders should do
Monitor short interest data—if hedge funds are aggressively shorting a stock, it may signal more downside ahead.
Watch for potential short squeezes where forced hedge fund buybacks trigger a price spike.
Use GoMoon.ai’s market sentiment tracking to detect extreme bearish positioning.
4. Traders Shift to Safe-Haven Assets and Alternative Markets
How they react
Move capital into safe-haven assets, such as:
Gold and silver (historically strong during recessions)
U.S. Treasuries and bonds Defensive stocks (Walmart, McDonald’s, consumer staples)
Stablecoins (USDT, USDC) in crypto
Increase exposure to inverse ETFs (SQQQ, SPXS) or volatility instruments like VIX futures.
Example
During the 2022 inflation-driven market downturn, investors flocked to gold and the U.S. dollar, causing them to outperform stocks.
In the 2008 recession, gold rose from $700 to $1,800, while equities collapsed.
What traders should do
Follow gold and bond market trends to anticipate risk-off sentiment.
Rotate into safe-haven sectors when market conditions worsen.
Use GoMoon.ai’s AI-powered risk analysis to confirm when safe-haven demand is increasing.
5. Central Banks and Governments Step in to Stabilize Markets
Who they are
Central banks (Federal Reserve, ECB, Bank of England) and governments control monetary and fiscal policy.
How they react
Cut interest rates to stimulate borrowing and economic activity.
Launch quantitative easing (QE) programs to inject liquidity into markets.
Issue stimulus checks, tax relief, and business bailouts to avoid deep economic contractions.
Example
The Federal Reserve cut interest rates to near-zero in 2008 and again in 2020, triggering substantial stock market recoveries.
The U.S. government injected $2 trillion in stimulus (CARES Act, 2020), leading to a rapid stock rebound.
What traders should do
Monitor central bank statements—rate cuts and stimulus often trigger market recoveries.
Look for early signs of economic policy changes before major rallies begin.
Use GoMoon.ai’s central bank tracking to anticipate liquidity-driven market moves.
6. Smart Money Starts Accumulating Before the Recession Ends
Who they are
Smart money includes billionaire investors, hedge funds, and corporate insiders who buy discounted assets.
How they react
Accumulate high-quality stocks quietly while retail traders panic-sell.
Increase insider purchases (executives buying shares of their own companies).
Focus on undervalued blue-chip stocks and sectors poised for recovery.
Example
Warren Buffett bought aggressively during the 2008 financial crisis, making billions when markets rebounded.
In early 2023, institutions accumulated stocks at low valuations, while retail traders were still bearish.
What traders should do
Track insider buying activity—CEOs buying their own company’s stock is a bullish signal.
Watch for smart money accumulation in beaten-down sectors before the broader market recovers.
Use GoMoon.ai’s historical event analysis to spot accumulation patterns.
How Forex and Crypto Traders Can Navigate a Recession

Understand the Impact of a Recession on Forex and Crypto Markets
Recessions bring heightened volatility, shifts in currency strength, and drastic changes in liquidity flows, making it essential for traders to adapt. This section explains what forex and crypto traders should do during a recession, including key strategies, risk management approaches, and how to identify profitable opportunities.
A. Forex Market During a Recession
Safe-haven currencies (USD, JPY, CHF) appreciate as investors exit risky assets.
Central banks respond by cutting interest rates or launching stimulus programs.
Emerging market currencies (TRY, ZAR, BRL) tend to weaken due to capital flight.
Commodity-based currencies (AUD, CAD, NZD) decline as global trade slows.
B. Crypto Market During a Recession
High-risk, speculative assets like altcoins face significant drawdowns as liquidity dries up.
Bitcoin and Ethereum often correlate with stock markets, falling alongside equities.
Stablecoins (USDT, USDC, DAI) become safe-haven assets within the crypto ecosystem.
Institutional investors reduce crypto exposure, impacting liquidity and price stability.
What to do
Monitor macroeconomic trends to understand where money is flowing.
Use GoMoon.ai's AI-driven event tracking to anticipate major forex and crypto shifts.
Focus on currencies and assets that benefit from recession conditions (safe-haven pairs, stablecoins, defensive forex trades).
Trade Safe-Haven Currencies and Crypto Stablecoins
A. In Forex:
During recessions, traders shift capital into safe-haven currencies, causing the following trends:
USD strengthens due to global demand for liquidity.
JPY rises as a risk-off currency during uncertainty.
CHF gains value due to Switzerland's stable economy.
High-beta currencies (AUD, NZD, GBP) decline due to risk aversion.
B. In Crypto
Bitcoin dominance rises as altcoins suffer liquidity crises.
Traders move into stablecoins (USDT, USDC, DAI) to preserve value.
Some traders hedge by shorting weak altcoins against BTC or ETH.
What to do
During risk-off periods, focus on forex pairs involving USD, JPY, and CHF.
In crypto, stay liquid in stablecoins until market conditions stabilize.
Use GoMoon.ai's AI event impact analysis to confirm risk-on vs. risk-off sentiment.
Adjust Trading Strategies for Increased Volatility
Recessions create wild price swings in forex and crypto markets. Adapting your strategies is crucial to surviving this environment.
A. Forex Volatility Strategies
Use wider stop-losses to avoid being stopped by sharp moves.
Trade during high-liquidity sessions (London and New York overlap) for better price execution.
Use ATR (Average True Range) stops instead of fixed pip stops to account for volatility.
B. Crypto Volatility Strategies
Avoid leverage—crypto crashes can liquidate positions quickly.
Trade BTC and ETH over altcoins, as they have higher liquidity and resilience.
Consider mean-reversion trades—buying extreme dips and selling spikes.
What to do
Switch to lower position sizes to reduce exposure to significant swings.
Use volatility-based indicators (ATR, Bollinger Bands) to adjust trade entries and exits.
Track historical volatility data using GoMoon.ai's event replay feature.
Short the Weakest Assets and Hedge Against Risk
Recessions create short-selling opportunities as weaker assets decline.
A. Forex Shorting Strategies
Short currency pairs where the quote currency is a haven (USD/TRY, USD/ZAR, USD/MXN).
Look for central bank policy divergence—short currencies from countries cutting rates.
Use GoMoon.ai to monitor central bank signals before taking short positions.
B. Crypto Shorting Strategies
Short weak altcoins that lack liquidity, development, or real-world adoption.
Use inverse ETFs, options, or perpetual contracts on platforms like Binance and Bybit.
Focus on tokens with high speculative interest but no strong fundamentals.
What to do
Identify currencies and cryptos with weak economic or technical foundations.
Use GoMoon.ai's sentiment tracking to detect panic selling before shorting.
Hedge long-term positions with selective short trades in weaker assets.
Pay Attention to Central Bank and Government Policy Decisions
A. Forex Market Impact
Rate cuts weaken currencies, while rate hikes strengthen them.
Stimulus packages devalue fiat currencies but provide short-term economic relief.
Government intervention (bailouts, fiscal stimulus) affects currency stability.
B. Crypto Market Impact
Regulations can ban or limit crypto trading, impacting liquidity.
Government CBDCs (Central Bank Digital Currencies) may compete with stablecoins.
Inflation-related monetary policies may push investors toward Bitcoin as an alternative.
What to do
Use GoMoon.ai's central bank alerts to adjust trading positions ahead of policy changes.
Monitor Fed, ECB, and BoE statements, as they drive major forex movements.
Stay informed on crypto regulation news, which can drastically affect market behavior.
Preserve Capital—The #1 Rule During Recessions
A recession is not about making the most significant gains but not losing money. Capital preservation ensures traders survive and capitalize on post-recession opportunities.
Risk Management Tactics
Reduce position sizes to lower overall market exposure.
Use stop-loss orders to limit downside risk.
Diversify—hold a mix of safe-haven assets and recession-resistant trades.
Take profits regularly—don't let winning trades turn into losses.
Psychological Adjustments
Stay disciplined—avoid revenge trading during volatile sessions.
Stick to pre-planned strategies rather than reacting emotionally.
Accept that some losses are inevitable—but managing them is key.
What to do
Use GoMoon.ai's AI-driven volatility alerts to minimize unexpected risks.
Avoid making high-risk, high-leverage trades that could wipe out accounts.
Focus on steady, controlled trading rather than speculative bets.
Use Our AI-powered Economic Calendar Tool for Free Today

What Are Economic Events?
Economic events measure how economies are performing. These can include reports on employment, inflation, economic growth, and trade. Think of economic events as scorecards that tell traders how well a country is doing. When nations release economic data, it gives insight into their financial health and helps project future performance. Major announcements can significantly impact the financial markets, creating volatility as traders react to the news and adjust their positions accordingly. Tracking economic events and understanding their impact on the financial markets can help traders make better-informed decisions.
What Happens to the Stock Market During a Recession?
During a recession, the stock market typically declines as investor sentiment sours. As economic performance deteriorates, businesses generate less revenue and profits. This ultimately weighs on stock prices, which leads to falling markets. Recessions are often accompanied by sharp drops in employment, which can hurt consumer confidence and spending. Since consumer activity drives a large portion of economic performance, lower expenditure can further decline corporate profits and stock prices. As the economy contracts, investors react to the worsening economic conditions and adjust their portfolios to brace for the impact. Economic data releases during this period often reflect the deterioration and can create even more volatility as markets respond to the news.
How Long Do Recessions Last?
On average, recessions last about 11 months, but the duration can vary significantly. Some recessions, like the Great Recession, last several years and can create long-lasting impacts. Others, like the COVID-19 recession, only last a few months but create sharp declines in economic performance and can significantly impact the financial markets. The best way to track a recession is through economic data. As the economy begins to recover, the focus will shift from the declining numbers to the improving metrics. Once the economy has turned and shows signs of strength, investor sentiment will improve and the markets will follow.
GoMoon: The Smarter Way to Track Economic Events
GoMoon transforms economic calendar data with AI-powered insights for smarter trading decisions. Our platform analyzes global events and rates their market impact on a scale of 1 to 10, helping you understand how they'll affect various assets. We've packed everything traders need: live economic event streaming, custom notifications, and historical event replay with TradingView charts. What sets us apart is our comprehensive approach to event analysis.
Whether you're tracking the impact of major economic announcements or comparing forecast data with actual outcomes, GoMoon provides straightforward, actionable insights. You can personalize your calendar, stream live meetings directly on the platform, and analyze historical events like the dot-com bubble or the COVID-19 crash to understand market reactions better. GoMoon clarifies the complex world of economic events for traders seeking data-driven decisions. Get started for free to get AI-powered economic insights today.
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