The economic environment in business terms is the environment in which a business operates and it has a great influence upon it. For any successful investment the economic environment has to be studied and fully analysed. A rational investor has to be well versatile when it comes to Market timing. Market Timing is the process of identifying the current state of the economy/market and assessing the likelihood of its continuing on its present course. It is the strategy of making buy or sell decisions of financial assets (often stocks) by attempting to predict future market price movements. The prediction may be based on an outlook of market or economic conditions resulting from technical or fundamental analysis. It is important to note that the investment occurs in an economy and therefore the economic conditions of the state can affect the returns.
There are two Conditions of the Economy that are important in the investment environment.
Recovery or expansion; This is the phase of the business cycle when the economy moves from a trough to a peak. It is a period when the level of business activity surges and gross domestic product (GDP) expands until it reaches a peak. During this phase, the Corporate profits are up and this helps stock prices. This phase is growth-oriented and speculative stocks do well.
Decline or recession; This is the phase of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters. During this phase, the values and returns on common stocks tend to fall.
Read also: Five Steps Of The Investment Process
Different Stages of an Economic/ Market Cycle
A peak is the highest point between the end of an economic expansion and the start of a contraction in a business cycle. The peak of the cycle refers to the last month before several key economic indicators, such as employment and new housing starts, begin to fall. In economics, a trough is a low turning point or a local minimum of a business cycle.
