What are the typical financial market effects of recessions?

During a recession, financial markets typically experience a decline in economic activity, which leads to lower consumer spending, reduced business investment, and heightened uncertainty. This economic downturn often results in a decrease in interest rates as central banks respond to weakening economic conditions by lowering rates to stimulate growth. Consequently, short-term interest rates tend to drop.

Simultaneously, in a recession, the negative outlook on corporate earnings and overall economic performance tends to cause stock prices to fall as investors reassess company valuations. The decline in both short rates and stock prices aligns with historical trends observed during recessions, reflecting the contraction in economic activity and investor sentiment.

Thus, the combination of dropping short rates alongside falling stock prices accurately captures the typical financial market effects experienced during recessions. Other choices describe different scenarios not generally consistent with the economic reality of recessive periods.