How do stock market indices behave during a recession?

When the economy slows, stock market indices are negatively affected by their cyclical nature and their sensitivity to risk aversion. Moreover, equity valuation is highly dependent on real long-term interest rates and falls if it is a rise in interest rates that triggered the recession. But dividends follow prices closely, which means that equities are a hedge against inflation. What is more, corporate earnings often recover rapidly after a recession. What do these complex mechanisms mean for the behaviour of share prices during a recession? Since the second half of the 1990s, we have seen that: It takes four years on average for stock market indices to regain their pre-recession levels; The downturn in stock market indices occurs during the rise in central bank s ’ interest rates; Stock market indices recover only shortly before interest rates bottom out, and well after central banks have started to cut them. T oday, t his points towards a long period of falling share prices, as interest rates are still rising.