# What’s a Market Downturn? What’s a Recession?

By: [Team Stash](/content/learn/author/team-stash/index.html)

Published: Nov 19, 2018  •  Updated: Aug 22, 2024

What’s the difference between a market downturn and a recession? We dig in.

#### In this article:

1. [**What is a market downturn?**](/content/learn/market-downturn-vs-recession/#what-is-a-market-downturn/index.html)
2. [**What’s a recession?**](/content/learn/market-downturn-vs-recession/#whats-a-recession/index.html)
3. [**More about recessions**](/content/learn/market-downturn-vs-recession/#more-about-recessions/index.html)
4. [**What should you do?**](/content/learn/market-downturn-vs-recession/#what-should-you-do/index.html)

Every economic cycle has its ups and downs. But how can you tell when there’s merely a lull in the action, or something more serious?

We’re talking about the difference between market downturns and recessions. While day-to-day market activity is generally different from what’s going on in the economy, a serious drop in markets can trigger an economic recession as well. Read on and we’ll break down the relationship between the two.

## What is a market downturn?

Market downturns occur when key market indexes such as the S&P 500, the Dow Jones Industrial Average, or the Nasdaq drop. Decreases in the value of these indexes don’t necessarily indicate a decline in economic activity, however, and they can turn around fairly quickly.

A market downturn of 10% is called [a market correction](/content/learn/whats-a-market-correction/index.html), and if indexes drop by more than 20%, it’s considered [a bear market](/content/learn/bull-market-vs-bear-market/index.html).

Markets can drop in reaction to the news cycle and political events in the short run, but they can also react to longer-term situations, such as changes to interest rates, companies or consumers taking on too much debt, and investor speculation, which can result in a run-up of stock prices, also known as a [stock bubble](https://www.forbes.com/sites/billconerly/2013/07/24/what-is-a-bubble/#7a712352e648).

Though market drops can be short-lived, a severe downturn, such as a bear market, can last months, or even years. In such cases, market downturns are likely to be associated with economic downturns and recessions.

## What’s a recession?

[A recession](/content/learn/what-is-a-recession/index.html) is an extended period of economic contraction. It’s often said that a recession occurs when the economy experiences two consecutive quarters—or six—of negative GDP growth. In other words, the economy isn’t growing, but shrinking. Other financial experts define a recession as a period of negative growth lasting for several months.

Shifting market indicators such as rising unemployment, falling GDP, and lower consumer spending can signal an economic downturn or a budding recession.

While the stock market typically falls during recessions, the market activity doesn’t necessarily determine whether or not the economy is in a recession. Because recessions are classified by economic growth, it’s possible to have markets trend upward while the economy is still in a recession.

Market downturns can lead to recessions, however. For example, a market downturn can cause significant decreases in capital, or money, available to both consumers and companies. As a result, companies may lay off workers, who will then have less money to spend, save, and invest.

## More about recessions

The shortest [recession](https://www.nber.org/cycles.html) on record (1980) lasted only six months, according to federal data stretching back to the 1850s. In contrast, a recession that started in 1873 lasted 65 months, or nearly five and a half years.

[The Great Recession](/content/learn/what-happened-during-recession-10-years-ago/index.html), which had its roots in the housing mortgage market, was triggered by the collapse of investment bank Lehman Brothers in [2008](https://www.thestreet.com/markets/lehman-brothers-collapse-14703153). The bank’s collapse sparked a sudden market downturn and eventually the collapse of real estate prices. Ultimately, the banking system froze up, requiring a massive government bailout. The financial crisis lasted 18 months, but the fallout from it still lingers today.

The most recent recession was [reportedly](https://www.marketwatch.com/story/us-entered-recession-in-march-after-end-of-longest-expansion-in-history-nber-finds-2020-06-08) triggered by economic shutdowns in the wake of the Covid-19 pandemic, which ended a 128-month economic expansion following the 2008 financial crisis.

## What should you do?

Market downturns, bear markets, and recessions are all a part of larger business cycles—the economy experiences periods of expansion and contraction. For investors, that means that they’re simply a part of life, and that there’s no avoiding them.

So, what should you do when a downturn or recession eventually rolls around? Stash recommends [staying the course](/content/learn/the-stash-way/index.html)—diversify your portfolio, continue investing regularly, and invest for the long-term.

Written by [Team Stash](/content/learn/author/team-stash/index.html)

We want to turn money into a source of hope and opportunity. We teach people how to build good habits, save more and make it easy and affordable to get started investing. So far, we’ve helped over 6 million people create a more secure financial future with our expert advice and award-winning investing app.