What is 'Consumer Cyclicals'

Consumer cyclicals is a category of stocks that rely heavily on the business cycle and economic conditions. Consumer cyclicals include industries such as automotive, housing, entertainment and retail. The category can be further divided into durable and non-durable sections. Durable cyclicals include physical goods such as hardware or vehicles, while non-durables represent items like movies or hotel services.

BREAKING DOWN 'Consumer Cyclicals'

The performance of consumer cyclicals is highly related to the state of the economy. They represent goods and services that are not considered necessities, but discretionary purchases. During contractions or recessions, people have less disposable income to spend on consumer cyclicals. When the economy is expanding or booming, the sales of these goods rise as retail and leisure spending increase. Companies in this sector include General Motors Company, Walt Disney Co., McDonald’s Corporation, Yum Brands Inc., and Amazon.com.

Consumer Spending Sensitivity

Consumer cyclical companies, also referred to as consumer discretionary companies, are particularly exposed to the ebb and flow of consumer spending. Consumer spending is affected by economic factors such as interest rates, inflation, unemployment and wage growth. When economic conditions begin to deteriorate, consumers are less inclined to spend their money on things they consider non-essential, such as flat screen televisions, vacations, new clothes and new cars. Consumer confidence is an important gauge of consumers’ attitudes about spending. A decline in the Consumer Confidence Index (CCI) often precedes a decline in consumer spending on discretionary items.

When the economy starts to slow down, consumer cyclical companies experience declining sales and earnings, putting pressure on their stock price. The consumer cyclical sector tends to underperform most other sectors when the economy is weak. However, it typically outperforms most sectors in the early stages of an economic recovery. For the 10-year period beginning in 2006, the consumer cyclical sector led all sectors in the economic recovery with a total return of 134%.

The Role of Consumer Cyclicals in a Portfolio

The consumer discretionary sector is considered more volatile than the consumer staples sector, which is less sensitive to economic changes, but it offers greater potential for growth. A balance of stocks from both sectors would provide greater stability over the long term. Investors can also increase stability by focusing on consumer cyclical stocks that pay dividends. Dividends can have the effect of cushioning the downside movement of consumer cyclical stocks. Examples of companies with a long history of dividend payments include Wal-Mart Stores Inc., McDonald’s, Lowes Corp., Genuine Parts Company and Target Corporation.

RELATED TERMS
  1. Cyclical Stock

    An equity security whose price is affected by ups and downs in ...
  2. Consumer Discretionary

    A sector of the economy that consists of businesses that sell ...
  3. Cyclical Risk

    The risk of business cycles or other economic cycles adversely ...
  4. Cyclical Industry

    A type of an industry that is sensitive to the business cycle, ...
  5. Consumer Spending

    The amount of money spent by households in an economy. The spending ...
  6. Consumer Goods

    Products that are purchased for consumption by the average consumer. ...
Related Articles
  1. Investing

    What is a Cyclical Stock?

    A cyclical stock is an equity security whose price is affected by ups and downs in the overall economy.
  2. Investing

    The Ups And Downs Of Investing In Cyclical Stocks

    This strategy can be profitable but only if you know when to dump these stocks.
  3. Financial Advisor

    Top 3 Consumer Cyclical Mutual Funds

    Obtain information on, and analysis of, some of the best performing mutual funds that offer exposure to the consumer cyclicals sector.
  4. Insights

    What's a Cyclical Industry?

    A cyclical industry is correlated to the business cycle.
  5. Insights

    Make Money With The Consumer Cyclical And Staple Indicator

    Knowing the difference between what consumers need and what they want can help you target your stock picks to follow consumer buying trends.
  6. Investing

    The 3 Largest Consumer Cyclicals ETFs (XLY, FXD)

    Find out which consumer cyclical exchange-traded funds (ETFs) are the largest in their category and how they have performed over the last 10 years.
  7. Investing

    3 Cyclical Industries To Exploit in 2016

    Learn about the three industries at the down end of their business cycles, and discover how these industries may improve in years to come.
  8. Investing

    Which Consumer-Related ETFs Should Investors Buy? (XLY, XLP)

    Analyze the fundamental performance and valuation of XLY and XLP to determine why XLY has grown faster. Find out which ETF is a better buy.
  9. Investing

    3 Popular Consumer Sector ETFs in 2016 (XLY, XLP)

    Find out which consumer sector exchange-traded funds (ETFs) are the most popular going into 2016 based on the amount of assets under management.
  10. Personal Finance

    What Does Cyclical Unemployment Mean?

    Cyclical unemployment is the change in job availability due to upswings and downswings in the business cycle. When the economy is robust and booming, cyclical unemployment is at its lowest. When ...
RELATED FAQS
  1. How does an economic downturn affect a cyclical stock?

    Discover the effects of an economic downturn on cyclical stocks. These stocks are highly leveraged to the business cycle ... Read Answer >>
  2. What is the difference between cyclical and non-cyclical stocks?

    Understand the difference between cyclical stocks and non-cyclical stocks. Learn about the underlying demand factors of each ... Read Answer >>
  3. What are the benefits of investing in a cyclical stock?

    Understand the benefits of investing in a cyclical stock. Learn how an investor can use those benefits to potentially reduce ... Read Answer >>
  4. Which economic factors most affect the demand for consumer goods?

    Understand how key economic factors such as inflation, unemployment, interest rates and consumer confidence affect the level ... Read Answer >>
  5. How can I use interest rates to indicate the right time to buy a cyclical stock?

    Determine the best way to use interest rates to figure out the best time to buy a cyclical stock. Cyclical stocks are tied ... Read Answer >>
  6. How does revolving credit differ from a general line of credit?

    Examine the consumer goods sector, which accounts for nearly one-third of consumer spending, and learn which goods account ... Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center