If you\u2019re thinking of dipping your toe into the stock market and have started doing some research, you may have come across the term \u201ccyclical stock\u201d. If you\u2019re not quite sure what it means, and whether it\u2019s a good or a bad thing, here\u2019s what you need to know.<\/p>
Cyclical stocks are stocks whose performance is affected by macroeconomic factors. When a country is doing well economically, cyclical stocks tend to perform better. In times of economic downturn or uncertainty, cyclical stocks perform less well.<\/p>
This is often a reflection of consumer confidence. Consumers tend to spend more when their finances are more stable, as is more likely to be the case in a strong economic climate.<\/p>
Macroeconomic factors that can affect cyclical stocks include political upheaval, war, and major health events such as the coronavirus pandemic. Some of these factors may affect all stock market sectors equally, while others may affect some sectors more than others.<\/p>
By their nature, cyclical stocks tend to be relatively volatile compared with their counterparts.<\/p>
Non-cyclical stocks are also known as \u201cdefensive\u201d stocks. They\u2019re stocks that tend to perform fairly consistently, and provide stable returns regardless of the economic climate.<\/p>
Investment experts might make use of certain indicators to assess a stock\u2019s volatility, such as the variability in its earnings per share, or its beta value. A beta value of greater than 1 means that a stock is relatively volatile compared with the rest of the market, indicating it is more likely to be a cyclical stock.<\/p>
More simply, it can help to think of cyclical stocks as stocks in companies that supply products and services that we can live without. Things that we choose whether or not to spend money on, rather than things that we rely on to live our lives.<\/p>
Money that we spend on \u201ccyclical\u201d products and services is often referred to as \u201cdiscretionary\u201d rather than \u201cessential\u201d spending.<\/p>
In the table below, we\u2019ve highlighted some stock market categories that would typically be regarded as \u201ccyclical\u201d, as well as some that would usually be seen as \u201cdefensive\u201d.<\/p>
| Cyclical stocks<\/th> | Defensive stocks<\/th><\/tr><\/thead> |
|---|---|
| Cars<\/td> | Energy<\/td><\/tr> |
| Fashion<\/td> | Food and drink<\/td><\/tr> |
| Tech<\/td> | Healthcare<\/td><\/tr> |
| Travel<\/td> | Utilities<\/td><\/tr><\/tbody><\/table> There will, of course, be grey areas where some stocks in a category are cyclical and others are defensive. Property is a good example. Investments in residential property might be regarded as more cyclical, as people are less likely to move house in a downturn. On the the other hand, investments in essential property, such as medical buildings or supermarkets, might be less cyclical in nature.<\/p> What are the stages of an economic cycle?<\/h3>Just as a country\u2019s economy doesn\u2019t flip from strong to weak overnight, the performance of cyclical stocks won\u2019t typically yo-yo from stellar to sub-par in a matter of hours or days. Not as a result of macroeconomic factors, anyhow.<\/p> An economy\u2019s cycle may follow the stages below as it ebbs and flows. The performance of cyclical stocks will tend to mirror these stages.<\/p>
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