Any economy goes through periods of both growth and decline and the way to prosper in either situation if you are trading stock is to always keep your eye on the big picture. There are profit opportunities to be had in both growth and declining markets and the expert investor will take advantage regardless. It would be unrealistic to expect continuous growth in stock markets and recession has to be accepted as a way of life. Investing in a growth period is relatively easy because bull markets are easy to handle but you may find it a little more difficult to cope with markets in times of recession and bearish conditions.
In economic terms, a recession can be defined as a period of prolonged decline in economic conditions. A recession is often characterized by low or negative growth in GDP, declining confidence for both consumers and businesses, higher unemployment and a decline in demand leading to lower sales and production for businesses. These conditions are not exactly inspire optimism in the future of stock investing but, like all economic cycles, recessions will pass and the economy will recover and this change can be predicted with some accuracy. Recessions are often marked by increased aversion to risk on the part of investors and consequently a large-scale shift to relatively risk-free investment.
You can prosper in these conditions by keeping your eye firmly on the big picture. There is no point in trying to enter and exit specific positions in specific sectors or stocks because this requires a degree of investment expertise that ordinary investors do not possess. As a starting point, consider the macro economic implications of a recession. Companies cut down or defer large-scale investments, consumers cut back on spending and optimism gives way to pessimism and uncertainty about what will happen in the future. This change in psychology has its effects on the capital markets. In the equity markets, because of the uncertainty about future earnings, people regard equity investments as higher risk and will therefore require a high rate of return to undertake their investments. Normally, this can only happen if share prices drop and this does happen as people get rid of their higher risk investment and moved to relatively safe avenues. This is a phenomenon that causes equity markets to decline during periods of recession and the decline can often be sharp.
If you see a sharp sustained trend in the decline in stock prices, almost certainly this decline is the harbinger of a recession. But, even in periods of decline, there are stocks that tend to perform well and the focus should be on them. For instance, companies with strong fundamentals and balance sheets with strong positive cash flow and low levels of debt are likely to be less affected by recessionary conditions than weaker companies. The strong companies have the ability to continue to operate near normally and enhance their ability to survive adverse economic conditions. Companies that produce consumer staples tend to be good investments because these are the last items of spending that the consumer will cut back. In contrast, industries such as consumer electronics and luxury goods are the first to feel the impact of recession.
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