Does the stock market trigger a recession?

No, stock market sell-offs do not necessarily mean we are in a recession. However, they are good barometers of coming storms or simple little squalls. So they do typically go along with each other. The Stock Market is and has always been prone to wild, emotional swings or what’s called volatility when there is uncertainty in the market. And they say women over react!  

A few things to know about the Stock Market:

Traders hate being surprised !

They like the Federal Reserve, businesses, politicians, and courts to pre-signal (aka: manage their expectations and give them heads up) so they can run their models and build changes into stock prices ahead of the market. And then they expect everyone to do exactly what they said they were going to do. (Seriously, wouldn’t that be a great way to live! Can someone chat with my hubby?!) 

Traders need data to evaluate prices which they don’t have right now

When traders and analysts evaluate corporate stock, corporate bond, and government bond prices, they need to assess the company’s or countries ability to make money (or collect taxes) and to pay bills. Think about your own personal finances.  You look at what you have in savings, how much money is coming in the door versus how much money is going out the door in taxes, living expenses, etc.  Now, apply that very basic logic across the entire economy to companies AND countries.

With our new normal, corporations are trying to do the right thing by keeping employees on the payroll which has money going out the door and very little money coming in with limited to no sales. Countries are trying to do the right thing by offering tax credits to the companies to offset tax liabilities and writing checks for supplies and resources with money they don’t necessarily have right now. Unfortunately, this event is hitting at a time when corporate, consumer, and national debt is all pretty high so many do not have the necessary rainy day funds to weather this storm.

Consequently, traders are trying to figure out how many months we’ll be in this new normal, who actually has money coming in the door, and who has enough cash to weather this storm and if they will have assets of value left after these big sell offs.  They are doing all of this analysis without any data!  Did I mention how traders hate surprises and uncertainty?!?!?!?

What are circuit breakers or automated stops in the Stock Market?

I’ve received several questions about automated stops or circuit breakers which are just like the electrical circuit breakers in your house.  If there is too much demand driving the electrical current too high in your house, to prevent a fire the circuit breakers trips and shuts down everything. It’s a safety measure. The market stops are the exact same thing. They are a safety measure designed to stop automated trading spiraling out of control and allow human intervention.

Many of us say, “I will buy stock ABC at $ 15. I like it between $10 and $20. If it hits $20, I’ll happily take my $5 earnings and move on. But I don’t want to lose all my money so if the price drops to $10, I will take my loss of $5 but no more.” So my broker puts in a stop loss order to automatically sell ABC stock if it hits $15. I then go off and live my life knowing I am protected from too big of a loss (or downside risk.) My order to sell can get triggered if the market freaks out over the price of tea in China and has absolutely nothing to do with company ABC. The ABC Company is still doing its thing but it’s stock price got hit because the entire market over reacted. 

Now, magnify our behavior across institutional investors and large trading houses. Once automated sell orders start triggering in large quantities, they continue to trip other sell orders and so on. If the automated trading is left unchecked, it will drive prices to the bottom. So the Securities & Exchange Commission (SEC), the regulatory body overseeing trading, requires the stock market to have circuit breakers in place so humans have to reassess trades, give everyone a chance to calm down, and assess what is really going on with the actual company. Again, it is simply a safety measure.

What can we do?

Stay calm, be prudent about how you choose to spend your money right now, and take the long view on the market. More importantly, focus on staying healthy, helping those in need within your community (Buy a gift certificate at your favorite restaurant so they get some cash; Leave an extra big tip on your pickup food; Donate cash to the local food bank;); finding simple ways to enjoy life with your family outdoors to relieve the stress of being cooped up, and being your amazing telecommuting self!

We will lead our families, our communities, and our teams calmly through this event!  #BeTheCalm #Leadership!!!

Stay Healthy! Susie