Daily Gains Letter

business cycle


The Cold Hard Truth About Economic Conditions and the Stock Market

By for Daily Gains Letter | Apr 12, 2013

120413_DL_zulfiqarWhen an investor is planning to grow their portfolio over time, they must realize that any economy—be it the U.S., Canada, Germany, or any other country in the world—goes through many business cycles. Some terms associated with these business cycles include “recession,” “recovery,” and “peak.”

In each stage of a business cycle, markets behave differently. Investors need to make sure they adjust their portfolio accordingly to minimize their risk. What may be good during times of economic prosperity may not be the best option during economic misery.

Recession
Recession simply refers to a period in a business cycle when a country experiences a downturn in its economy. Some characteristics of a recession include slowing industrial production, rising unemployment, and declining sales. A country is said to be in a recession when its gross domestic product (GDP)—what the economy produces—contracts for two consecutive quarters.

In a recession, businesses do poorly, so as a result, stock markets aren’t usually a great place to be. Think of it this way: if people don’t have jobs, will they go out and buy? Not likely. Companies’ profit margins get squeezed, and the stock market falls.

During a recession, investors need to look for safety—their losses in the stock market can add up. They may want to consider high-grade government bonds and companies with good fundamentals. Investors might also want to look at financial “safe havens,” such as gold, to protect their assets.

Recovery/Expansion

Recovery, or expansion, is a stage in the business cycle when things are getting better for the economy. Consumer confidence improves, businesses hire, and individuals find jobs. Consider the U.S. economy, for … Read More