Cyclical Stocks Can Make Your Portfolio Volatile. Here's What to Know About Investing in Them (2023)

FAQs

Are Cyclical stocks volatile? ›

Cyclical stocks are volatile and tend to follow trends in the economy. Non-cyclical stocks outperform the market during an economic slowdown. Companies of cyclical stocks sell goods and services that many buy when the economy is doing well but cut during downturns, such as luxury goods.

Cyclical stocks are viewed as more volatile than noncyclical or defensive stocks, which tend to be more stable during periods of economic weakness. However, they offer greater potential for growth because they tend to outperform the market during periods of economic strength.

Cyclical stocks are prone to high risk as it works in business cycles that include severe fluctuations. High risk is involved when the production turns down during high demand; this could lead to an instant downhill on the graph.

Cyclical businesses perform well during economic expansions but typically experience significantly declining sales and profits during recessions and other challenging economic times. Cyclical stocks tend to move up and down in value alongside the market.

The advantages of such stocks are they bring massive growth, provide more dynamics than the benchmark, stimulate interest rates, and reflect business sentiment. The pitfalls of such stocks are that they are risky and vulnerable, with huge losses, need careful analysis, and are inappropriate for passive investors.

For investing in cyclical stocks, price-to-book multiples are better to use than the P/E. Prices at a discount to the book value offer an encouraging sign of future recovery. But when recovery is already well underway, these stocks typically fetch several times the book value.

Defensive stocks are also sometimes referred to as non-cyclical stocks because they don't follow the cycles of the economy. In fact, they typically underperform when the market is up. Cyclical stocks, on the other hand, are stocks that tend to do well when the economy is doing well. Think luxury goods and services.

The short answer is yes. Bank stocks are generally affected by recessions for a couple of reasons. First, interest rates tend to fall during recessions.

Cyclical risk is the risk of business cycles or other economic cycles adversely affecting the returns of an investment, an asset class or an individual company's profits.

What is the best asset during a recession? ›

That said, if you have cash to invest, you may want to consider buying recession-friendly sectors such as consumer staples, utilities and health care. Stocks that have been paying a dividend for many years are also a good choice, since they tend to be long established companies that can withstand a downturn.

Utility Companies

The demand for electricity, waste management, gas, and water remains stable during a recession. So, the utility sector is a recession proof industry that can do wonders for your investment portfolio. Besides, utility companies have a stable cash flow and limited competition.

Head and shoulders pattern is considered to be one of the most reliable reversal chart patterns. This pattern is formed when the prices of the stock rises to a peak and falls down to the same level from where it had started rising.

NASDAQ: AMZN

As a cyclical company, investors should expect Amazon's performance to improve when macroeconomic conditions ease.

For a long time, and perhaps even today, Apple has been considered a highly cyclical business that ebbs and flows with the broader economic cycle.

A cyclical stock typically moves up or down depending on the upward or downward movement in the economy. These stocks are usually traded heavily as investors try to buy them at the low point of a business cycle and sell at the high point of the same cycle.

Energy, materials, industrials, consumer discretionary, financials and information technology are traditionally considered cyclical sectors, as stocks in these sectors have tended to be highly correlated to economic cycles.

What Is a Cyclical Industry? A cyclical industry is a type of industry that is sensitive to the business cycle, such that revenues generally are higher in periods of economic prosperity and expansion and are lower in periods of economic downturn and contraction.

What is the opposite of cyclical stocks? ›

defensive stocks. The opposite of a cyclical stock is a non-cyclical or defensive stock. Companies with defensive stocks are not as sensitive to the ups and downs of the economy.

Goldman Sachs strategists see Kroger, Pfizer, Costco, and four others as defensive stocks that could top the broader market in a deep recession. The Federal Reserve's interest-rate hikes could drive the economy into a deep recession. Certain stocks, though, could still post solid gains should that come to pass.

Industries engaged in utilities, healthcare, and consumer staples are less reliant on business cycle shifts. Such companies produce or distribute goods and services we always need, so we refer to them as non-cyclical.

Buffett likes financial sector stocks, including payment processors and banks. Bank of America, Moody's, U.S. Bancorp, and American Express make up 21% of Berkshire's stock portfolio.

For years, big American banks were Warren Buffett's favorite investment. Like another top Buffett industry — railroads — banks are part of the infrastructure of the country, a nation he continually bets on.

The 66 rating InvestorsObserver gives to McDonald's Corp (MCD) stock puts it near the top of the Consumer Cyclical sector. In addition to scoring higher than 77 percent of stocks in the Consumer Cyclical sector, MCD's 66 overall rating means the stock scores better than 66 of all stocks.

One example of a cyclical pattern, the business cycle, is from macroeconomics. Over time, economic expansions are followed by economic recessions followed again by economic expansions.

Quick Reference. A regularly recurring pattern, e.g., of seasonal fluctuation in prevalence of insect vectors or respiratory infections in primary school children.

The definition of cyclical is something that goes in cycles, or something that occurs in a repeating pattern. The change of seasons each year is an example of something that would be described as cyclical.

How to become a millionaire during a recession? ›

Think about the kind of companies that perform well in recessions. Utility companies do well. Tobacco, alcohol, fast food, and soft drinks do well. Consumer staple companies like Kimberly-Clark, Colgate-Palmolive, Procter & Gamble, and Johnson & Johnson do well.

In addition, during recessions, people with access to cash are in a better position to take advantage of investment opportunities that can significantly improve their finances long-term.

Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.

It will give them the funds to buy stocks or other assets during the decline. Because of how precious cash can be during times of financial stress, many have said that cash is king. The phrase means that having liquid funds available can be vital because of the flexibility it provides during a crisis.

The threat of a U.S. recession remains alive in 2023. The consensus estimate on the probability of a meaningful downturn in the American economy in the next 12 months is at 65%, according to Goldman Sachs Research. But our own economic analysis rates that probability much lower, at 35%.

Is it possible that a recession will hit in 2023? Absolutely. But the likelihood of a first quarter recession is pretty low. Right now, unemployment levels are almost the lowest they've been in 20 years, and consumer spending has yet to decline in a meaningful way.

Currently, many of the most volatile stocks operate in the technology, oil and gas, and healthcare/biotechnology industries.

What stocks are always volatile? ›

The energy companies sector has historically been one of the most volatile, as confirmed by the course of 2022 so far. The price development of energy companies is of course strongly linked to the price of energy commodities.

Cyclical risk is the risk of business cycles or other economic cycles adversely affecting the returns of an investment, an asset class, or an individual company's profits.

Ross Stores (ROST) is the most volatile stock on the Nasdaq 100 index. The firm is an American discount retailer that operated 1,923 in the US, as of January 2022.

Commodities tend to be the most volatile asset class. Understanding and monitoring volatility is an important exercise for investors and traders alike. When determining the risk versus reward profile of any asset, volatility is a statistical measure that will help define parameters.

The first hour of trading, beginning at 9:30 a.m. Eastern Time, is the most volatile of the day, with floods of orders based on overnight-night news and analysis. This creates large price swings in a short amount of time.

The highest risk investments are cryptocurrency, individual stocks, private companies, peer-to-peer lending, hedge funds and private equity funds. High-risk, volatile investments may bring high rewards, or they may bring high loss.

Because volatile markets can lead to swings both upwards and downwards as prices gyrate, buying a straddle or a strangle are popular strategies. These both involve simultaneously buying a call and a put on the same underlying and for the same expiration.

What sectors are least volatile? ›

Utilities are generally considered a less volatile sector compared to the others on this list. The companies in this sector are heavily regulated and generally provide investors with dividends. Long-term investors will purchase utility stocks for their overall stability and income stream.

Before selecting a cyclical stock, it makes sense to pick an industry that is due for a bounce. In that industry, choose companies that look especially attractive. The biggest companies are often the safest. Smaller companies carry more risk, but they can also produce the most impressive returns.

Energy, materials, industrials, consumer discretionary, financials and information technology are traditionally considered cyclical sectors, as stocks in these sectors have tended to be highly correlated to economic cycles.