Table of Contents
What are cyclical stocks?
Cyclical stocks vs. non-cyclical stocks
Which industries have cyclical stocks?
Identifying cyclical stocks
Advantages and disadvantages of investing in cyclical stocks
The bottom line
Jun 21, 2022
6 min read
Cyclical stocks are shares of companies whose performance tends to follow the ups and downs of the economy.
Some investors want stocks that tend to remain stable and reliable even in an economic downturn. But others want the chance for big returns, and they’re willing to risk losses for that opportunity. That’s the difference between what are known as cyclical and non-cyclical stocks.
Cyclical stocks are shares of companies whose performance tends to follow the ups and downs of the economy: They typically rise when the economy is expanding, with high employment rates and consumer spending, and they tend to fall in times of recession or contraction.
Cyclical stocks are tied to economic performance because they’re generally shares of companies that sell goods or services that are discretionary, such as travel, entertainment, and restaurants. Because these cyclical sectors aren’t usually providing necessities, consumers are more apt to spend on these when economic times are good and pull back when things are tight. Examples of cyclical stocks include Starbucks, Delta Air Lines, Disney, and Apple.
Non-cyclical stocks are the opposite: They’re also called defensive stocks because consumers continue to spend on these categories even during economic downturns. Many non-cyclical stocks are tied to goods and services such as health care, water, gas, and groceries.
No stock is recession-proof, but the difference is these companies aren’t as affected by economic swings as cyclical stocks. Though they generally may not have as much potential upside, these non-cyclicals are generally considered to be a safer place for investors to plunk down cash and ride out a downturn. These defensive stocks include General Electric, Costco, Johnson & Johnson, and NextEra Energy.
Several industries should be on a list of cyclical stocks. Here are a few of the most notable:
These are the purchases that consumers could choose to hold off buying when they’re belt-tightening. Discretionary retail items include jewelry, makeup, and high-end clothing.
Both leisure and business travel flourish in flush times and are scaled back in downturns. This category includes airlines, hotels, and booking/travel agencies.
This sector tends to hurt in an economic downturn, as eating out can get pricey and more consumers opt to cook at home when money is tight.
Modern life is increasingly online, both at work and at home. But in a recession, people and businesses may hang onto existing devices rather than upgrade to the latest and greatest. Most, though not all, tech stocks are cyclical.
Cars are much like consumer tech: When consumers feel comfortable spending, they have fewer qualms about buying or leasing a new (or new-to-you) car. In a downturn, they’re likely to stick with what’s already in the garage.
This is the sector people spend on when they want to kick back and relax: concerts, streaming video services, music subscriptions, and movie tickets. They’re often some of the first items to go when people are on a budget.
These are durable, long-lasting goods that people don’t replace often—items such as washers, refrigerators, and furniture. Like electronic devices and cars, consumers often delay upgrading these goods in a downturn.
This sector is affected by the boom or bust in the categories above. When people are spending on physical goods, factories stay humming. When demand wanes, so does manufacturing.
In good economic times, demand for mortgage and car loans is high. In a downturn, not only does demand fall, but more consumers are likely to have trouble paying existing loans and credit cards. Bank earnings are also sensitive to changes in interest rates, which typically fall before and during a recession, cutting into lenders’ profit margins.
The standard method to identify a cyclical stock is to examine the so-called beta value, also called the beta coefficient. This number tells investors how sensitive a specific stock is to movements in the broader market; it’s calculated by comparing the stock’s returns relative to the market as a whole.
A beta value of one indicates a stock that moves in lockstep with the market, while a value higher than one denotes that the stock is more volatile, and a figure below one means shares move less than the broader market. So, most cyclical stocks have a beta value higher than one.
Investors can also look at trends in a stock’s earnings per share (EPS). The EPS of cyclical stocks tend to fluctuate, rising and falling with the overall economic sentiment.
A third figure relevant to value cyclical stocks is the price-to-earnings ratio (P/E), which measures a stock’s price in relation to its (EPS). Cyclical stocks usually have P/E ratios that are lower, so they tend to be cheaper when compared to most non-cyclicals.
Investing in cyclical stocks comes with both benefits and risks. Those opposing forces often are intertwined.
Cyclical stocks can be particularly volatile, with prices moving higher or lower depending on the broader market and other external factors. On one hand, that means there’s a chance for significant gains and profit that beats the overall market, especially when compared to more stable defensive stocks. On the other hand, cyclicals can also drop sharply when the economic picture is bleaker.
Some investors try to time purchases and sales based on the economic cycle, though as a rule of thumb this is difficult to get right: Rising or falling markets can fall or rise still more. And market sentiment, as the COVID crisis shows, sometimes can change almost overnight.
Cyclical stocks’ decline in a recession is bad news for investors who bought high. For other investors, it can offer a buying opportunity.
Defensive stocks tend to be reliable performers that are less subject to unpredictable external factors. That steadiness is welcome during a downturn. But the limited downside usually means there’s also a limited upside. A mix of cyclical and non-cyclical stocks in a portfolio is one way investors try to balance stability and risk.
Cyclical stocks typically follow the broader economy, gaining when times are good and declining in a downturn. They’re generally companies that deal in discretionary spending like entertainment and travel, which consumers often scale back during an economic slowdown. Non-cyclical, or defensive, stocks generally are more stable throughout the economic cycle.
Both categories have advantages and disadvantages: Cyclical stocks tend to be riskier investments than defensive stocks, but they also offer the potential for bigger gains. Non-cyclicals are steadier, even in tough economic times, yet that stability comes with lower chances for big returns. Investors usually hold a mix of both in a diversified portfolio.
At Titan, we are value investors: we aim to manage our portfolios with a steady focus on fundamentals and an eye on massive long-term growth potential. Investing with Titan is easy, transparent, and effective.
Get started today.
Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.
This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.
Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see Titan’s Legal Page for additional important information.
You might also like
What Is an At-the-Market Offering & How Does It Work?
At-the-market offerings are one tool publicly traded companies can use to raise capital. They are faster and more flexible than traditional follow-on offerings.
What Happens If a Stock Goes to Zero?
Suffering a “zero” isn’t always possible to avoid, but investors may consider monitoring the company’s spending, revenue, and profit growth.
Day Trading: Buying and Selling a Stock on the Same Day
Taking advantage of fluctuations in the market is an appealing idea, having access to apps and online brokerages has made day trading a more accessible venture.
How to Invest in Stocks: A Beginner’s Step-by-Step Guide
To help you understand the stock market, its terminology and rules, investment strategies, what type of investor you are, and how to invest in stocks, here’s a beginner’s guide.
© Copyright 2023 Titan Global Capital Management USA LLC. All Rights Reserved.
Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.
Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.
The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.
Cryptocurrency advisory services are provided by Titan. Cryptocurrency trading is provided by Bakkt Crypto Solutions LLC ("Bakkt Crypto"). Bakkt Crypto is not a registered broker-dealer or a member of SIPC or FINRA. Cryptocurrencies are not securities and are not FDIC or SIPC insured. Bakkt Crypto is licensed to engage in virtual currency business activity by the New York State Department of Financial Services. Cryptocurrency execution services are provided by Bakkt Crypto (NMLS ID 1828849) through a software licensing agreement between Bakkt Crypto and Titan. Please ensure that you fully understand the risks involved before trading: bakkt.com/disclosures.
Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.
Contact Titan at firstname.lastname@example.org. 508 LaGuardia Place NY, NY 10012.