A recession is an economic contraction or period of decline. Unlike stagnation or a slowdown in economic growth, a recession involves the active contraction of an economy as measured by GDP. Different precise definitions exist, some economists measuring them in months, but a standard definition is two quarters of successive economic contraction. During a recession, and often just before, the prices of equities and other speculative assets typically fall, while safe haven assets such as gold and the US Dollar often rise.
A recession can be caused by a market downturn, and recessions regularly cause bear markets, but they are not the same thing. For a recession to occur the entire economy must experience negative growth for a set period, which may or may not be accompanied by a financial crash. In practice, almost all recessions see a weakening in the stock market, but not all market crashes trigger a recession. Recessions can be limited to a single country, a region, or in serious cases can take hold worldwide.
During a confirmed recession, traders normally rotate out of ‘risk on’ assets and into their ‘risk off’ equivalents – so out of equities, corporate bonds, and emerging markets currencies and into safe haven assets such as gold, government bonds of stable nations, and global reserve currencies. This process can sometimes happen before a recession is confirmed, as markets tend to be very responsive to slight changes in economic conditions. Once a recession is well underway equity prices might be depressed, presenting buying opportunities for traders willing to wait until better times.
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