1. The Basic Concept
The performance of an investment will be influenced by the economy. The effects of inflation or deflation may interfere with anticipated returns. Thus, the direction of the economy must be considered when formulating an investment strategy.
A. The Business Cycle
The business cycle represents changes in economic activity. It has four phases: expansion (also called recovery), peak, recession (also call contraction), and trough.
In the expansion phase, business activity is growing, production and demand are increasing, and employment is expanding. Businesses and consumers normally borrow money to expand, which causes interest rates to rise.
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