Which sectors are usually considered defensive during a recession?
The value of a stock depends on its expected cash flows and the required rate of return (the discount rate). The economic environment shapes both. Economy analysis - Fiscal policy: tax cuts encourage spending; removing subsidies or adding taxes discourages it. - Monetary policy: tighter money supply hurts expansion plans and working capital. - A macro forecast covers GDP, inflation, interest rates and unemployment. Analysts track releases such as WPI, CPI, IIP and GDP growth. - Banks and financial stocks are among the most interest-rate-sensitive; pharma is among the least. - The stock market is a leading indicator: prices reflect expectations of future activity, so they tend to turn before the economy does. Sentiment and fund flows can still push the market ahead of, or behind, the economy.
Exam trap: A good company is not automatically a good investment. If the share already trades well above intrinsic value, it may be a poor buy.