Contraction & Recessions

Learn about how to navigate when the economy is going down, as it always does once in a while.

The economy is in a contraction phase if GDP is shrinking, unemployment is high and companies are reporting slow growth and weak profits 💰

During the contraction phase, since businesses are struggling, stock prices typically fall 📊

If GDP declines for two quarters in a row, the economy enters a recession

The last time this happened was in 2008 when the housing market crashed and millions lost their jobs 💔

So what can you do to navigate a contraction or recession as an investor? 🤔

First, don't panic and sell everything just because your investments are going down 🙅‍♂️

However, you could consider moving some money away from stocks into less volatile, lower-risk assets like cash or bonds, especially when interest rates are high!

As a stock investor, focus on high-quality companies with strong balance sheets that can weather the storm and grow in the long-term 🌧️

Some sectors that tend to hold up better in recessions are consumer staples, utilities and healthcare – in other words, goods and services that people need no matter how the economy is doing! 🍞🩺

It can also be a good time to look for opportunities to buy stocks at discounted prices 💸

The stock market often overreacts to economic challenges, surfacing potentially undervalued stocks!

Just like how expansions always end in a peak, contractions – and recessions – eventually end with a trough, and markets have always recovered from them 💪

Let’s explore that next!

Test your knowledge

In a contraction, GDP is:

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A recession is defined as:

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Industries that may hold up better in recessions include:

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The stock market's reaction to economic challenges is often:

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Unemployment during a contraction period is usually:

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What's next?

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