What Is a Recession? Causes and Market Impact

A recession is a meaningful, sustained downturn in economic activity that spreads across the economy. The word alone can move markets, because recessions tend to drag down corporate profits and confidence.

Understanding what a recession is — and what it is not — helps put scary headlines in perspective.

How a recession is defined

A common rule of thumb is two consecutive quarters of shrinking economic output (GDP). In practice, economists look more broadly at jobs, spending, income, and production to declare a recession.

Because the official call often comes well after a recession has begun, markets usually react to the warning signs long before any formal announcement.

What causes recessions

Recessions can be triggered by many things: sharp interest-rate increases, financial crises, a collapse in confidence, or external shocks like an energy crisis or pandemic.

Whatever the trigger, the pattern is similar — spending falls, companies cut back, unemployment rises, and the slowdown feeds on itself for a time.

Recessions and the stock market

Stocks often fall before and during recessions as investors anticipate weaker profits. But markets are forward-looking and frequently begin recovering before the economy does.

Historically, recessions have been a normal part of the economic cycle, and markets have gone on to reach new highs after them — which is why long-term investors try not to panic.

Frequently asked questions

What defines a recession?

A recession is a significant, widespread decline in economic activity lasting more than a few months. A common shorthand is two consecutive quarters of falling GDP, though economists weigh jobs, income, and spending too.

What causes a recession?

Recessions can be triggered by sharp interest-rate hikes, financial crises, collapsing confidence, or external shocks. The common result is falling spending, business cutbacks, and rising unemployment.

What happens to stocks in a recession?

Stocks often decline before and during recessions as investors expect weaker profits, but because markets look ahead, they frequently start recovering before the economy does.