What Is a Cyclical Stock?
Let me explain what a cyclical stock is. These are shares in companies like car manufacturers and airlines that move in sync with the economic cycle. When the economy expands, these companies often see a boost in sales because consumers have more money to spend on non-essential items. But during recessions, their stock prices can drop sharply as people cut back on spending. If you're considering investing in them, you need to understand their volatility and the chance for better returns when the economy is strong.
How Cyclical Stocks Respond to Economic Changes
Cyclical stocks come from industries such as car manufacturing, airlines, furniture retail, clothing stores, hotels, and restaurants. You can afford luxuries like buying a new car or traveling when the economy is thriving. But these are the first expenses people eliminate in tough times. In a deep recession, these stocks might even become worthless, and companies could fail. That's why you should monitor your positions carefully, though it doesn't mean you have to avoid them altogether.
These stocks follow the economic cycle closely, which might tempt you to time the market—buying low during slumps and selling high during peaks. Just be cautious about how much of your portfolio you allocate to them at any given time.
Risks and Benefits of Investing in Cyclical Stocks
Cyclical stocks are generally more volatile than noncyclical or defensive stocks, which hold up better during economic weakness. However, they can provide stronger growth potential by outperforming the market in good times. If you're aiming for long-term growth with controlled volatility, consider mixing cyclical and defensive stocks in your portfolio.
In economic expansions, you might turn to exchange-traded funds (ETFs) for exposure to cyclical stocks. For instance, the SPDR Consumer Discretionary Select Sector Fund (XLY) is a popular option in this area.
Comparing Cyclical and Noncyclical Stocks
Cyclical stocks' performance ties directly to the economy, but noncyclical stocks don't follow the same pattern. These defensive stocks often outperform the market even in slowdowns. They cover essentials like food, gas, and water—think companies like Walmart. Adding them to your portfolio can hedge against losses from cyclical stocks during economic dips.
Examples of Cyclical Stocks by Industry
Cyclical stocks break down into durables, nondurables, and services. Durable goods involve physical items lasting over three years, like cars from Ford, appliances from Whirlpool, or furniture from Ethan Allen. Rising durable goods orders can signal upcoming economic strength.
Nondurable goods are soft items lasting less than three years, produced by companies like Coca-Cola or Procter & Gamble. Services include non-physical offerings like travel and entertainment from Walt Disney or streaming from Netflix.
Frequently Asked Questions
- How Can I Collect Income From Investing in Stocks? A stock gives you ownership in a company, and you can earn dividends if it performs well—reinvest them or take them as cash. Selling shares at a profit yields capital gains.
- What Are Some of the Best Cyclical Stocks? The best ones fit your goals and risk tolerance; sources like Yahoo Finance highlight familiar names like Costco, Expedia, UPS, Airbnb, and Kohl's.
- What Is a Counter-Cyclical Stock? This is a noncyclical stock that moves opposite to the economy, often rising when a recession looms.
The Bottom Line
Cyclical stocks track the economic cycle, rising in prosperous times and falling in recessions, typically from companies offering discretionary goods like dining and entertainment. They can deliver high returns in booms but with added volatility. To manage risk and support growth, balance them with stable noncyclical stocks in your diversified portfolio.
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