Cyclical Risk

Definition of 'Cyclical Risk'


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. Cyclical risks exist because the broad economy has been shown to move in cycles – periods of peak performance followed by a downturn, then a trough of low activity. Between the peak and trough of a business or other economic cycle, investments may fall in value to reflect the uncertainty surrounding future returns as compared with the recent past.

Cyclical risk can also be tied to inflationary risks, as some investors consider inflation to be cyclical in nature.

Investopedia explains 'Cyclical Risk'


Cyclical risk does not typically have a tangible measure, but instead is reflected in the prices or valuations of assets that are deemed to have higher or lower cyclical risks than the market. For example, certain stocks are considered cyclical because company net earnings tend to rise and fall with the business cycle and may be volatile from peak to trough.

These stocks will typically sell off (fall in price) when the economy first shows signs of a slowdown, and therefore earnings valuations will fall compared to the broad market. Conversely, cyclical stocks will typically rise faster than the broad market when the economy is coming out of the trough period of the business cycle, as these stocks are now seen as able to grow earnings faster in the near future.

Cyclical risk of inflation can be somewhat mitigated by purchasing inflation-protected securities or through the use of derivatives.



comments powered by Disqus
Hot Definitions
  1. XW

    A symbol used to signify that a security is trading ex-warrant. XW is one of many alphabetic qualifiers that act as a shorthand to tell investors key information about a specific security in a stock quote. These qualifiers should not be confused with ticker symbols, some of which, like qualifiers, are just one or two letters.
  2. Quanto Swap

    A swap with varying combinations of interest rate, currency and equity swap features, where payments are based on the movement of two different countries' interest rates. This is also referred to as a differential or "diff" swap.
  3. Genuine Progress Indicator - GPI

    A metric used to measure the economic growth of a country. It is often considered as a replacement to the more well known gross domestic product (GDP) economic indicator. The GPI indicator takes everything the GDP uses into account, but also adds other figures that represent the cost of the negative effects related to economic activity (such as the cost of crime, cost of ozone depletion and cost of resource depletion, among others).
  4. Accelerated Share Repurchase - ASR

    A specific method by which corporations can repurchase outstanding shares of their stock. The accelerated share repurchase (ASR) is usually accomplished by the corporation purchasing shares of its stock from an investment bank. The investment bank borrows the shares from clients or share lenders and sells them to the company.
  5. Microeconomic Pricing Model

    A model of the way prices are set within a market for a given good. According to this model, prices are set based on the balance of supply and demand in the market. In general, profit incentives are said to resemble an "invisible hand" that guides competing participants to an equilibrium price. The demand curve in this model is determined by consumers attempting to maximize their utility, given their budget.
  6. Centralized Market

    A financial market structure that consists of having all orders routed to one central exchange with no other competing market. The quoted prices of the various securities listed on the exchange represent the only price that is available to investors seeking to buy or sell the specific asset.
Trading Center