Cyclical Risk

AAA

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.

RELATED TERMS
  1. Business Cycle

    The fluctuations in economic activity that an economy experiences ...
  2. Systematic Risk

    The risk inherent to the entire market or entire market segment. ...
  3. Toppy

    A slang term used when markets are reaching highs that are unstable, ...
  4. Cyclical Stock

    An equity security whose price is affected by ups and downs in ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments ...
  6. Procyclic

    A condition of positive correlation between the value of a good, ...
Related Articles
  1. The Ups And Downs Of Investing In Cyclical ...
    Investing

    The Ups And Downs Of Investing In Cyclical ...

  2. Great Company Or Growing Industry?
    Markets

    Great Company Or Growing Industry?

  3. Peter Lynch On Playing The Market
    Active Trading

    Peter Lynch On Playing The Market

  4. Recession: What Does It Mean To Investors?
    Active Trading Fundamentals

    Recession: What Does It Mean To Investors?

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center