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When the COVID-19 pandemic hit in 2020, the stock market crashed as a whole. But some industries, like dining and airlines, were hit especially hard, while others, like life and health insurance, remained relatively unaffected.
All stocks are somewhat volatile, meaning their price isn’t set and changes based on market conditions. However, some stocks are more volatile than others, returning market-beating gains when the economy is booming and heavy losses in a recession. These are known as cyclical stocks.
Buying and holding a diversified portfolio index funds can often be a better and safer investment strategy than picking individual stocks and trying to time the market.
For investors who have the risk tolerance for individual stocks and don’t mind paying attention to economic and market cycles, cyclical stocks have the potential to add gains to their portfolios. But experts warn against trying to time the stock market, and for many investors, a strategy of buying and holding a diversified portfolio of low-cost index funds may offer similar returns for much less risk.
Here’s what you need to know about how cyclical stocks work, and what you should consider before you invest in them.
What Are Cyclical Stocks?
In general, cyclical stocks are more sensitive to economic cycles, says Kevin Matthews II, a former financial advisor and author of “From Burning to Blueprint: Rebuilding Black Wall Street After a Century of Silence.”
“When a company’s stock is considered cyclical, it tends to go up in price when the economy is said to be thriving or recovering from rough times,” says Mabel Nuñez, founder of Girl$ on the Money, a financial education website aimed at helping women invest. “However, the company’s stock tends to decline when the economy goes through a downturn or any sign of uncertainty.”
Cyclical stocks vs. non-cyclical stocks
While NextAdvisor’s preferred investing strategy involves creating a diversified portfolio with low-cost index funds to hold for the long term instead of trading individual stocks, understanding the different types of stocks can help you make more informed decisions about your investment strategy. This includes knowing the difference between cyclical stocks vs. non-cyclical stocks.
It’s worth noting that all investments are to some degree volatile, meaning that they could lose or gain value at any time, unlike cash in a savings account. But some types of stocks are more stable than others.
While cyclical stocks follow economic trends and cycles, non-cyclical stocks are more consistent throughout economic downturns and aren’t as affected by economic downturns, Nuñez says. Cyclical stocks are more prone to boom and bust pricing and can experience wild swings as the economic situation changes.
Non-cyclical stocks are sometimes called “defensive stocks” and have a greater degree of stability, even in the face of economic uncertainty. “This is because non-cyclical stocks are generally in the business of providing essential non-discretionary goods like groceries and utilities,” Matthews says.
What Companies and Industries Are Considered Cyclical?
“For the most part, companies that depend heavily on disposable income often fall into the category of cyclical stocks,” Nuñez says. “For example, companies within industries such as entertainment, travel, leisure, luxury, retail, restaurant, technology, among many others, fall into the cyclical category,” she adds.
Some of the common industries considered cyclical include:
- Auto components: Revenue for auto parts manufacturing dropped in 2020 as unemployment rose and consumer and business spending fell due to the coronavirus outbreak. Some auto-parts related companies might include automotive parts retailers AutoZone (AZO) and O’Reilly Automotive (ORLY), as well as auto parts manufacturer Tenneco (TEN).
- Construction: The housing market historically accounts for about 60% of construction spending in the United States, and it’s a volatile market. Builders and materials providers can be impacted by economic cycles and changes in homebuying trends. Some related companies include construction machinery company Caterpillar (CAT), construction equipment rental company United Rentals (URI) and residential homebuilder D.R. Horton (DHI).
- Semiconductor: The relatively short lifespan of technology items contributes to the wide swings and cyclical nature of the semiconductor industry. Some related companies include wireless technology company Qualcomm (QCOM), semiconductor company Advanced Micro Devices (AMD), and graphics card maker Nvidia (NVDA), which saw demand earlier in 2021 due to crypto mining and the excitement around cryptocurrency investing.
- Airlines: As people have more money to spend on non-essentials like travel, airline stocks are likely to see an improvement in performance, says Matthews. As travel slowly returns, Airline stocks that may be affected include Delta Air Lines (DAL), Southwest Airlines (LUV) and United Airlines (UAL).
- Hotels, restaurants and leisure: Other travel and leisure stocks, including hospitality stocks, struggle when people have less to spend. The hotel industry, for example, took a hit in 2020. And, while it’s recovering in 2021, the American Hotel & Lodging Association’s industry forecasts say it will take until 2023 to reach pre-pandemic levels. Examples of these types of stocks include Brinker International (EAT), the parent company of restaurant Chili’s, travel shopping company Expedia (EXPE), and hotel chain Hilton (HIL).
- Textile, apparel and luxury goods: Luxury goods do well when the economy is booming, Nuñez explains, while people cut back on their clothing purchases when recession hits. Some stocks in this area include Capri Holdings (CPRI), which owns the luxury fashion brand Jimmy Choo, luxury home goods company RH (HR), and textile maker Unifi (UFI).
Advantages of Cyclical Stocks
The biggest advantage to cyclical stocks is the potential for growth during times of economic growth. Even though these stocks drop in recessions, Matthews suggests that those with the right risk tolerance could benefit.
“Recessions, at least historically, only happen once a decade and last 18 months on average,” says Matthews. “If you have the tolerance for volatility, you may find yourself winning more times than not,” he adds.
However, buying cyclical stocks is in no way required to get a good return on your investment. The S&P 500, which tracks the entire stock market, had an average annual return of 13.6% for the past ten years, according to a 2020 report by investment bank Goldman Sachs. For many long-term investors, such as those saving for retirement, buying and holding low-cost index funds that track the S&P 500 may offer similar rewards in the long term for less work and less risk than trying to time the market.
Disadvantages of Cyclical Stocks
One of the biggest issues with trying to invest in cyclical stocks is that it encourages investors to engage in behavior that gets very close to market timing, Nuñez points out.
“There is absolutely no way to time the stock market or know with any certainty what a stock will do from one day to the next,” she says.
It’s also easy to get spooked when trying to time the market with cyclical stocks, and it could result in selling low and losing out, rather than staying the course, according to Matthews.
How Investors Can Benefit from Cyclical Stocks
“If an investor is strategic and focused on taking full advantage of cyclical stocks, it is possible to take advantage of the cycle, buying during the rise and start selling when things change,” Nuñez says. “However, this is not an easy task,” she adds.
Indexers are already probably holding cyclical stocks as part of their index funds or ETFs, says Matthews. For those who want more exposure to cyclical stocks, but are wary of picking investments, Matthews suggests looking into a consumer discretionary ETF with low fees.
In the end, though, both Nuñez and Matthews suggest taking a step back and considering stocks from great companies that you can feel comfortable owning for years, without the need to try and follow cycles.
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.Is it good to invest in cyclical stocks? ›
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.What are the disadvantages of cyclical stocks? ›
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.Do cyclical stocks do well in recession? ›
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.What are the pros of cyclical stocks? ›
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.What is the best way to invest in cyclicals? ›
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.What are the most cyclical sectors? ›
- Auto components.
- Hotels, restaurants, and leisure.
- Textile, apparel, and luxury goods.
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.Are banks cyclical stocks? ›
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.What are cyclical risks? ›
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.What is the safest stock during a recession? ›
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.
- High-yield bonds. ...
- Stocks of highly-leveraged companies. ...
- Consumer discretionary companies. ...
- Other speculative assets.
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.What is the most stable stock to invest in? ›
Best safe stocks to buy
- Berkshire Hathaway. Berkshire Hathaway (NYSE:BRK. ...
- The Walt Disney Company. ...
- Vanguard High-Dividend Yield ETF. ...
- Procter & Gamble. ...
- Vanguard Real Estate Index Fund. ...
- Starbucks. ...
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.How do you know if a stock is cyclical? ›
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.What sectors of S&P are cyclical? ›
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 highly cyclical industry? ›
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.Is Costco a defensive stock? ›
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.What is the most defensive stock? ›
- Archer Daniels Midland Company (NYSE:ADM) Number of Hedge Fund Holders: 37. ...
- Constellation Brands, Inc. (NYSE:STZ) ...
- Lockheed Martin Corporation (NYSE:LMT) ...
- McDonald's Corporation (NYSE:MCD) ...
- Dollar General Corporation (NYSE:DG) ...
- The Coca-Cola Company (NYSE:KO) ...
- Walmart Inc.
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.What Bank did Warren Buffett invest in? ›
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.Why does Warren Buffett like Bank stocks? ›
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.Is McDonald's a cyclical stock? ›
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.What is an example of a cyclical pattern? ›
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.What is an example of a cyclical trend? ›
Quick Reference. A regularly recurring pattern, e.g., of seasonal fluctuation in prevalence of insect vectors or respiratory infections in primary school children.What is an example of cyclical? ›
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? ›
- Invest as much as you can. The easiest way to get rich during a recession is to invest as much money into the stock market as you can. ...
- Protect your income. Stable income is a key part of personal finance success, including building wealth. ...
- Cut back on expenses.
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.Is it better to have cash or property in a recession? ›
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.What companies are hit hardest by a recession? ›
Industries affected most include retail, restaurants, travel/tourism, leisure/hospitality, service purveyors, real estate, & manufacturing/warehouse.What companies thrive after a recession? ›
- Childcare. Daycare will always be in demand as long as parents need someone to care for their children while they work. ...
- Repair Services. ...
- Funeral Homes. ...
- Trash Haulers. ...
- Cigarettes and Alcohol.
|STOCK||NUMBER OF SHARES OWNED||VALUE OF STAKE|
|Chevron (NYSE:CVX)||165,359,318||$29.9 billion|
|Coca-Cola (NYSE:KO)||400,000,000||$25.2 billion|
|American Express (NYSE:AXP)||151,610,700||$23.1 billion|
|Occidental Petroleum (NYSE:OXY)||194,351,650||$13.3 billion|
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.Will we go into a recession in 2023? ›
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 a recession coming in 2023? ›
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.Which stock category are the most volatile? ›
Currently, many of the most volatile stocks operate in the technology, oil and gas, and healthcare/biotechnology industries.
What stocks are always volatile? ›
- Sun Pharma.
- Suzlon Energy Ltd.
- Garden Silk Mills.
- Madhucon Projects Limited.
- KM Sugar Mills.
- 3i Infotech Ltd.
- GVK Power & Infrastructures Ltd.
- Jubilant Industries.
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.What is cyclical stock risk level? ›
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 are the 5 most volatile stocks? ›
Highly Volatile Stocks in India
- Sabar Flex India Limited. ...
- Zomato Limited. ...
- Tarmat Limited. ...
- IDFC First Bank Limited. ...
- Poonawalla Fincorp Limited. ...
- Steel Authority of India Limited.
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.What is the most volatile asset to trade? ›
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.What time are stocks most volatile? ›
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.Which investment has the most volatile returns? ›
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.Which strategy is best for volatile market? ›
- Define your objectives and bolster your defenses. ...
- Focus on trending stocks. ...
- Watch for breakouts from consolidations. ...
- Consider taking some profits. ...
- Be prepared.
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.How do you pick a cyclical stock? ›
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.Which S&P sectors are cyclical? ›
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.