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Recession. It's a word that strikes fear into the heart of chief executives, economists, and everyday Americans alike.
And for good reason -- recessions bring job losses, falling stock prices, and general economic gloom and doom. But while almost no one is enthusiastic about the thought of a recession knocking on the front door, there are a few good aspects of these periodic downturns.
1. Recessions correct economic imbalances
Like it or not, our economy is not built to go on growing indefinitely without hitting any bumps in the road. Over time, excesses tend to build up in our markets, and these excesses have to be worked out for the economy to get back to a healthy, realistic, and sustainable rate of growth.
In the late 1990s, one area of excess was in the stock market, as shares of technology companies were pushed higher and higher despite underlying fundamentals that didn't justify these new valuations. More recently, the excesses have been in the housing market, fueled by low rate cuts in the early part of the decade and by lenders overextending themselves to make loans to underqualified buyers.
Periods of economic contraction eliminate these sorts of unsustainable bubbles and get the economy back on solid ground. Like a visit to the dentist, recessions can be painful, and they can't be over soon enough, but in the end, they're for your own good.
A stronger and more sound economy will rise from the dust of our present downturn.
2. Stock market drops that accompany recessions provide new opportunities
Since the stock market is one of the primary indicators of the health of the economy, recessionary periods are frequently accompanied by meaningful drops in our stock market. Though most people panic when they see the market heading into the red, what they don't realize is that market downturns constitute a giant fire sale.
During periods of market panic, both good and bad stocks get dragged down for the count. This means that oodles of stocks with great long-term prospects are now available at a discount. Everyone knows that financial stocks have really taken a beating, but other corners of the market are offering fresh, new opportunities.
For example, tech stocks have been relatively oversold in recent weeks, and many companies with incredible long-term growth prospects are now trading at a fraction of their former prices.
Check out former highfliers such as Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL), which are down more than 25% year to date. Other big names such as Dell (Nasdaq: DELL), Oracle (Nasdaq: ORCL), and Microsoft (Nasdaq: MSFT) have fallen anywhere from 9% to 18% so far this year. All of these names possess significant competitive advantages in their niches and represent compelling long-term tech plays. They're also all cheaper than they were a few months ago.
3. It won't last forever
It's true. Recessions don't last forever. The economy has lived through 10 recessions since World War II, and it has rebounded every single time. And although it may seem that there's always another piece of bad news being trumpeted in the media, the average post-WWII recession has lasted a mere 10 months.
In almost all of these cases, the stock market headed down in advance of the onset of a recession and rebounded ahead of the recession's end. This makes sense when you remember that the stock market is a forward-looking device. But this also means that even if we are in for many more months of sour economic news, we may not have to endure as many months of falling stock prices.
Position yourself to profit
Recessions can humble even the most confident investor. When the market is going up and everyone is making money, most folks think they can go it alone. But when things get rough, many formerly steel-willed investors turn to the experts for help.
If you want the latest insights on how some of the smartest investing minds and money managers are putting their money to work during these difficult times, check out our Motley Fool Champion Funds investing service. We scour the universe to bring you the best mutual fund ideas each and every month, and you can take a look at all of our fund picks with a free 30-day trial today.
So while the news in the media will likely be of the doom-and-gloom variety for quite awhile, try not to get caught up in the hype. There's almost always a silver lining -- even in something as dark and menacing as a recession.
Amanda Kish heads up the Fool's Champion Funds newsletter service. At the time of publication, she did not own any of the companies mentioned herein. Apple and Dell are Stock Advisor recommendations. Dell and Microsoft are Inside Value picks. Click here to find out more about the Fool's disclosure policy.
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