Since the value of a stock is it's future cash flows discounted to the present and it's had it's current cash flows impacted, usually that makes forecasts revise those future earnings downward lowering the valuation of the company.
Other reasons are assets are sold to make up for lost income needed to pay for expenses, and stocks being liquid often get sold first.
The "money" in the economy is actually mostly credit,
and during a recession it contracts
From a look at the M2 and M3 money supply, there never seems to have been a contraction:
https://fred.stlouisfed.org/series/M2
https://fred.stlouisfed.org/series/MABMM301USM189S
That seems to be a pretty strong argument against the money contraction theory.
If I am purchasing using $100k of margin and my collateral drops to the point that I no longer have the margin. That 100k is gone. It wasn't a real 100k in the first place, it was leveraged and backed by a volatile asset.
Also, recession causes people to spend less and save more. Further reducing demand.
So they park it in something which is believed to be incredibly safe like money market funds or a savings/checking account because a 0% to 1% rate of return beats the risk of a 20%/50%/100% haircut by investing in anything else which gets hammered by the unwinding of the recession.
But how can you borrow money to somebody if you don't physically have those money?
Before "somebody" lost their job and sold their stock, there were X people holding Y dollars. Afterwards, there are still X people holding Y dollars. Nothing changed. The amount of money available to bid on stuff is still the same. Both, the sum of money and also the average amount per person.
Maybe it's better to think of it as X-1 people holding Y+1 dollars :P
But really, I think the above poster answered your question with this bit:
> This adds downward pressure on the market since people must sell
Prices go up when you bid higher than the current price for something, and conversely they go down when you bid lower than the current price.
When someone sells in these situations, it means the current average price has dropped.
Also sometimes, when people are desperate to sell, they can really lowball the value of something causing its overall value to depreciate significantly.
That's the basics of how a credit bubble works.
That’s not how it works, so your premise is flawed.
Even if it is how it works, that’s not directly related to the stock market, because stock market valuations are speculative based on future earnings, not present earnings. Earning less money is not a prerequisite to a reduced stock valuation; often, growing slower than previously anticipated is enough.
But the reason there are fewer things is because producers are responding to less demand for things. It's not like a recession just knocks out production leaving demand untouched, causing the price to move along the demand/supply curve. You won't have the same amount of money as before being bid on the fewer things.
Wouldn't those savings go into the stock market, making stocks more expensive?
For a stock price to fall someone has to sell, and someone has to buy, so someone is taking the long position in said company.
Additionally, the stock price is the belief on future profits so if the horizon looks worse then the past, then people may want to shift investments.
This is why the government measure of recession-resistance is called "consumer confidence", not "consider spending" ("aggregate demand").
As the parent comment said, the only explanation that really adds up would be that the amount of "available money" in the economy must be going down as a result of defaults on credit.
fewer people buying stocks than selling
If one day there are 100 people that want to buy the stock, and the next day there are 10 people interested, the prices will fall.
If you're an individual with some spare cash, buying stocks during a recession is probably a good idea, even if they falling.*
If you're a population, you probably don't have much spare cash.
There's some time lag stuff going on in there too.
*Blah blah 1990s Japan blah blah global diversification.
Because of the way the math works relatively small changes in future earnings and risk can have a large impact on asset sizes.
Because stocks are just the right to a stream of earnings
If companies produce less, money should also be worth less. As your money is your share of bidding power on those fewer things.
The price of a stock is the ratio of the value of a company and the value of money. And should therefore stay the same if the industy overall produces less stuff.
You can either own part of the industry that produces stuff. Or you can own money with which you can place bids on the stuff the industry produces.
During a recession, the industry produces less. Now at first you might say: That is the answer. The industry produces less. So it has less value.
But if the amount of money is the same, the bids per piece of stuff should go up. Because there is the same amount of money bidding on fewer things. So the industry should still make the same amount of money.
Any easy answer to this, why stocks tank during recessions?