Finance Definitions: Economic Cycles

Finance Definitions: Economic Cycles

On our trek through finance definitions, we cannot bypass a major influencing factor: economic cycles. These cycles have occurred since our economy began, and they are expected to continue well into the future. So let's take a closer look at economic cycles, at how they affect you and at what to do about them.

What are Economic Cycles?

In the broadest definition, economic cycles are periods of growth and stagnation in our businesses and in our economy. Also known as periods of expansion or contraction, the booms and recessions that we experience in our businesses and our total economic structure are quite normal.

Although economic cycles are normal and to be expected, it is difficult to predict any pattern to the cycles. Even so, macroeconomics studies how different activities in businesses may affect the overall economy and economic cycles. We won't detail each here, but here are a few economic theories to look into: Keynesian economics, credit/debit cycle, real business cycle, politically-based business cycle, Marxist economics, Georgism and Austrian school.

How do Economic Cycles Affect Me?

Obviously, business cycles can affect you in business, particularly in a few key areas. Businesses based in construction, transportation, and restaurant or hotel hospitality will experience the biggest booms during growth and the largest negative impact during recessions. This is painfully true right now, during our current recession; people with jobs or businesses in these areas were hit the hardest with job losses and business failures. This is because when recessions hit, general consumers tend to put off extravagant purchases like vacations, home improvements or purchases, and buying new cars.

Economic cycles also affect us in the stock market. Companies often report losses during recessions, making the stock market decline. This decline can lead to fewer people investing at all or more people changing investments to safer bets, like low-interest CDs and money markets (where at least they're not losing money).

How Do I Deal?

When the stock market fluctuates with economic cycles, it may be tempting to change your portfolio. In fact, many people rush to make changes that could stem the flow of loss during recessions, or they may purchase hot stocks during upswings. However, these tactics can actually be dangerous.

When you follow the pack to a purchase of a hot stock, it may be a sign that the stock is stuck in a bubble. As you may remember, bubbles can burst at any moment and leave the investor with a stock that is much less valuable. Similarly, changing your portfolio during recessions can leave you out in the cold when the market rebounds.

Often, it is better to research companies to determine which is a good fit for your investment. Then sticking with it through the long haul, including the good times and the bad times, will often yield you results.

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