Changes in the
business cycle impact the return on securities in different asset classes. We'll discuss the business cycle's effect later in this section.
The business cycle has four phases:
- Expansion - this phase begins after a low point in the economy and is characterized by increased economic activity and real GDP increases.
- Peak - this is the period where the growth rate of the expansion slows, and the economy is in a period of prosperity.
- Contraction - this follows the peak and is characterized by a reduction in GDP, as well as other business indicators. Also known as recession.
- Recovery - this is where the contraction reaches bottom (also called a trough) and may be stagnant for a time before starting the next expansion.
Phases of the Business Cycle
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Look Out!
The term recession may refer to the contraction stage in the business cycle, but it also refers to a prolonged drop in GDP that lasts at least two quarters. |
An understanding of the business cycle can help one to cope with an economic decline. Check out the article
Recession - What Does It Mean to Investors for more information.
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