Many investors believe that recession is around the corner, but the question is what the term recession depicts. The term economic cycle is nothing but the fluctuations of the economy between periods of expansion (growth) and contraction (recession). It is basically the overall state of the economy and it is also known as the business cycle. Many factors such as GDP, interest rate, total employment, and consumer spending helps us to determine the current stage of the economic cycle. A recession is a period when the economy of a country is doing badly, for example, because the industry is producing less and more people are becoming unemployed. A period of negative economic growth is considered a recession. During the recession phase of the business cycle or economy, the level of income and employment declines as well as stock prices also fall.
As told earlier that the fear of recession is at the top as the Federal Reserve gears up to fight inflation. Governments, financial institutions, and investors manage the course of action and effects on the economic cycle in a different way. Governments generally use fiscal policy. In order to handle and cope with a recession challenge, the government uses expansionary fiscal policy, which involves rapid deficit spending (when government spending exceeds its revenue). It can also try contractionary fiscal policy by taxing and running a budget surplus to reduce total spending to restrict the economy from overheating during expansions.
Central banks may use monetary policy. When the business cycle hits a downturn, a central bank lowers the interest rates to boost or encourage spending and investment. During expansion, it can implement contractionary monetary policy by raising interest rates and retarding the flow of credit into the economy to reduce the pressure of inflation.
During the expansion phase, investors find opportunities in the technology, capital goods, and basic energy sectors. When the economy contracts, investors may purchase companies that thrive during recessions such as utilities, financials, and health care.
In the most simple, terms those businesses that can trace the relationship between their performance and economic cycles over the passing time can plan according to strategies to protect themselves from approaching downturns, and position themselves to take maximum advantage of economic expansions. The investors of the stock market have started playing defense and wondering about strategies that whether it may survive or not. If the economy is going to face a recession, it’s common for the investors of the country to worry about falling stock prices and the impact on their portfolios. During the recession phase of the business cycle or economy, the level of income and employment declines as well as stock prices also fall.
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