Recession

The exam loves the sector-rotation question: given a phase of the cycle, pick which holdings to overweight. The “tell” is the verb — in a contraction you rotate toward defensive/non-cyclical names and away from high-beta cyclicals, the mirror image of an early expansion. A second favorite makes you sort lagging indicators (unemployment, CPI/inflation) from leading ones (yield-curve slope, building permits, manufacturers’ new orders) — the leading set turns before output does. Watch the trap that an inverted yield curve signals recession risk: it is a leading indicator with a long, variable lead, not proof a contraction has begun.

Do not confuse a recession (falling output) with deflation (falling prices) — link to inflation: in a demand-driven slump they often coincide as spending collapses, but stagflation shows recession with rising prices, breaking the reflex. Another classic trap: a demand-driven recession is a leftward shift in aggregate demand, not a movement along one good’s demand curve. Memory hook: defensives are your umbrella — you want utilities, staples, and healthcare when it rains.