When the economy heads into a tailspin, you may hear news reports of dropping housing startsincreased jobless claims and shrinking economic output. How does this affect us as investors?

What do house building and shrinking output have to do with your portfolio? As you'll discover, these indicators are part of a larger picture, which determines the strength of the economy and whether we are in a period of recession or expansion. For some background reading, check out: A Review Of Past Recessions.

The Phases of the Business Cycle In order to determine the current state of the economy, we first need to take a good look at the business cycle as a whole. Generally, the business cycle is made up of four different periods of activity extended over several years.

These phases can differ substantially in duration, but are all closely intertwined in the overall economy. Peak - This is not the beginning of the business cycle, but this is where we'll start. At its peak, the economy is running at full steam. Employment is at or near maximum levels, gross domestic product GDP output is at its upper limit implying that there is very little waste occurring and income levels are increasing.

In this period, prices tend to increase due to inflation ; however, most businesses and investors are having an enjoyable and prosperous time. Recession - The old adage "what goes up must come down" applies perfectly here.

Will the Next Stock Market Crash Cause a Recession?

After experiencing a great deal of growth and success, income and employment begin to decline. As our wages and the prices of goods in the economy are inflexible to change, they will most likely remain near the same level as in the peak period unless the recession is prolonged.

The result of these factors is negative growth in the economy. Trough - Also sometimes referred to as a depression, depending upon the duration of the trough, this is the section of the business cycle when output and employment bottom out and remain in waiting for the next phase of the cycle to begin. Employment, production and income all undergo a period of growth and the overall economic climate is good.

Notice in the above diagram that the peak and trough are merely flat points on the business cycle at which there is no movement. They represent the maximum and minimum levels of economic strength. Recession and recovery are the areas of the business cycle that are more important to investors because they tell us the direction of the economy.

To further complicate matters, not all business cycles go through these four steps sequentially. For instance, during a double dip recessionthe economy goes through a recession followed by a short recovery and another recession without ever peaking. Not everyone hurts during a recession. Learn more in Industries That Thrive On Recession. Recession Versus Expansion Recession is loosely defined as two consecutive quarters of decline in GDP output.

This definition can lead to situations where there are frequent switches between a recession and expansion and, as such, many different variations of this principle have been used in the hope of creating a universal method for calculation.

The National Bureau of Economic Research NBER is an organization that is seen as having the final word in determining whether the United States is in recession. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy:. By looking at these four indicators, economists at the NBER hope to gauge the overall health make money with minecraft servers the market and decide whether the economy is in recession or expansion.

The tricky part about trying to determine the state of the economy is that most indicators are either lagging or coincidental rather than leading. When an indicator is "lagging" it means that the indicator changes only after the fact.

That is, a lagging indicator can confirm that an economy is in recession, but it doesn't help much in predicting what will happen in the future. Learn more about this in Economic Indicators To Know. What Does this Mean for Investors? Understanding the business cycle doesn't matter much unless it improves portfolio returns. What's an investor to do during recession? Unfortunately, there is no easy answer. It really depends on your situation and what type of investor you are.

For some ideas, see Recession-Proof Your Portfolio. First, remember that a bear market does not mean there are no ways to make money.

Some investors take advantage of falling markets by short selling stocks. Essentially, an investor who sells short profits when a stock declines in value. Problem is, this technique has many unique pitfalls and should be used only by more experienced investors.

If you want to learn more, see the tutorial Short Selling. Another breed of investor uses recession much like a sale at the local department store. Referred to as value investingthis technique involves looking at a fallen stock not as a failure, stock market rebound as a bargain waiting to be scooped up.

Knowing that better times will eventually return in the economy, value investors use bear markets as buying sprees, picking up high-quality companies that are selling for cheap. There is yet another type of investor who barely flinches during recession. A follower of the long-term, buy-and-hold strategy knows that short-term problems will barely be a blip on the chart when taking a year horizon. This investor merely continues dollar-cost averaging in a bad market the same way as he or she would in a good one.

Of course, many of us don't have the luxury of a year horizon.

At the same time, many investors don't have the stomach for riskier techniques like short selling or the time to analyze stocks like a value investor does. The key is to understand your situation and then pick a style that works for you. For example, if you recession affects stock market close to retirement, the long-term approach definitely is not for you.

Instead of being at the mercy of the stock marketdiversify into other assets such as bondsthe money marketreal estate, etc.

Recession: What Does It Mean To Investors?

Conclusion The financial media often takes on a "sky is falling" mentality when it comes to recession. But the bottom line is that recession is a normal part of the business cycle. We can't say what the html select option bold italic course is for you - that's a personal decision.

However, understanding both the business cycle and your individual investment style is key to surviving a recession. For further reading, check out The Impact Of Recession On Businesses jobs for msc computer science freshers in mumbai Profiting In A Post-Recession Economy.

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What Does It Mean To Investors? By Investopedia Staff Share. It has a more extensive definition of recession, which deems the following four main factors as the most important for determining the state of the economy: Employment Personal income Sales volume in manufacturing and retail sectors Industrial production. The financial media and investors are haunted with the prospect of a double-dip recession.

We look to the past to see if a double-dip recession is in our future. Find out the truth about recessions and how they impact your portfolio. Find out how this economic cycle affects both small and big business. Financial downturns are part of the economic cycle and may have important long-term benefits. Here's a look at how a potential recession could impact your net worth in a negative way.

Learn how declining profit margins have foretold nearly every recession of the past 50 years, and analyze whether they may signal economic contraction in Here we look at the biggest economic declines in the U. Advisors who have clients who may fear a recession should take note that there is always some opportunity in a volatile market. Many factors contribute to a recession, but the biggest one is inflation. Learn more about the relationship between recessions and financial markets by identifying the fundamental characteristics Learn what a recession is, some attributes of an economy in a recession, and why the unemployment rate tends to have a domino Figure out how to take advantage of recessions, what assets to buy and which ones to avoid.

Recessions are where some great According to the National Bureau of Economic Research NBERrecession is defined as "a significant decline in economic A growth recession is an instance in which an economy grows at such a slow pace that it creates net unemployment, meaning Learn about the mechanisms that cause cyclical unemployment and find out about the role recessions and downturns play in An expense ratio is determined through an annual A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies.

A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. A statistical technique used to measure and quantify the level of financial risk within a firm or investment portfolio over No thanks, I prefer not making money.

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