Effects of a Falling Stock Market
                     Effects of a 
Falling 
Stock 
Market
Introduction
Movements in the stock market 
can have a profound economic 
impact on the economy and 
individual consumers. A collapse 
in share prices has the potential 
to cause widespread economic 
disruption.
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2008 Share 
price falls
The fall in share prices 2008/09 
was reflecting the real economic 
problems and after the share price 
falls of 2008, we did get a steep 
recession starting at the end of 
2008 early 2009. 
The falling share prices and 
financial uncertainty contributed 
in a small way to the economic 
downturn.
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2020 Share 
price falls
The fall in share prices since the 
start of the year primarily reflect 
concern and uncertainty over the 
global spread of Coronavirus. 
Share prices have fallen 15% and 
could fall further.
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Wealth effect
The first impact is that people 
with shares will see a fall in their 
wealth. If the fall is significant, it 
will affect their financial outlook. 
If they are losing money on shares 
they will be more hesitant to 
spend money; this can contribute 
to a fall in consumer spending. 
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Effect on 
pensions
Anybody with a private pension or 
investment trust will be affected 
by the stock market, at least 
indirectly. 
Pension funds invest a significant 
part of their funds in the stock 
market. Therefore, if there is a 
serious and prolonged fall in share 
prices, it reduces the value of 
pension funds. 
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Confidence
Often share price movements are 
reflections of what is happening in 
the economy. E.g. a fear of a 
recession and global slowdown 
could cause share prices to fall. 
The stock market itself can affect 
consumer confidence. 
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Investment
Falling share prices can hamper 
firms ability to raise finance on 
the stock market. 
Firms who are expanding and wish 
to borrow often do so by issuing 
more shares – it provides a low-
cost way of borrowing more 
money. However, with falling 
share prices it becomes much 
more difficult.
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 Bond 
market
A fall in the stock market makes 
other investments more 
attractive. People may move out 
of shares and into government 
bonds or gold. These investments 
offer a better return in times of 
uncertainty. 
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Pension 
funds
Many private pension funds will 
invest in the stock market. A 
substantial and prolonged fall in 
the stock market could lead to a 
fall in the value of their pension 
fund, and it could lead to lower 
pension payouts when they retire. 
Similarly, if the stock market does 
well, the value of pension funds 
could increase. 
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Business 
investment
The stock market could be a 
source of business investment, 
e.g. firms offering new shares to 
finance investment. This could 
lead to more jobs and growth. 
The stock market can be a source 
of private finance when bank 
finance is limited. However, the 
stock market is not usually the 
first source of finance.
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