Cyclical periods can last for months or years. Cyclical industries experience extended periods of lower revenue that are a reflection of economic prosperity, supply and demand, and consumer tastes. By investing in certain industries during periods of reduced income, investors may take profits when company earnings increase due to a changing economy, a change in consumer preferences or a change in prices.

Durable goods such as automobiles and washing machines are cyclical products. A paper published in December 2015 by the Emerging Markets Review indicated it is easier to predict the returns of entire industries than it is to predict returns of individual stocks. The strength of a company during the down period determines the long-term viability of a company overall. Companies in cyclical industries must earn enough profits during high periods to shoulder the losses or reductions in revenue during the down periods. Cyclical investing is different from value investing in that value investors look for equities with low perceived values. Alternatively, cyclical investing acknowledges not that a company is undervalued, but that it is experiencing a definite period of reduced revenue.

Impacting Factors

Increases in interest rates benefit mortgage providers but increase the debt obligations owed by large blue-chip companies. As many dividend-paying companies already have high financial obligations, an increase in payments further diminishes profits. As the United States continues to improve economically and the Federal Reserve increases interest rates, industry revenue responds to improvements in consumer demand. Large companies, however, can handle these large cash flows. Falling gas prices aid some industries while being detrimental to oil companies.

Oil and energy companies will be among the hardest hit in 2016 because of an oversupplied oil market. Energy is cyclical due to the ever-changing supply and demand pressures on crude oil products. Durable product sales are on the rise in the U.S. but experienced a significant drop in years past. To benefit from increasing revenue from higher economic activity, investors can look to companies that produce durable goods with sales that dwindled during the financial crisis of 2009.

Energy

Stock prices in large companies in the energy sector have slid in response to falling oil prices. Energy is impacted by international trade agreements and the at-times unpredictable production levels of oil wells. It is likely that energy stocks may experience further slides before regaining strength. Investors can look to the likes of Exxon Mobil and BP as the stock prices of both companies have slid since 2014. With gas prices hitting an 11-year low in January 2016, large energy companies that may withstand trying times will be attractive to investors looking to place funds in cyclical stocks. To successfully tolerate further decreases in stock prices, investors should consider their investment goals prior to making purchases in addition to how much a company has to gain when the downward pressures of high supply have been removed.

Auto

If the economy takes a dive, automobile sales will come to halt; as such, the sale of cars in the U.S. has begun to increase as the economy improves. The sale of automobiles in the U.S. is an indication of the discretionary spending allowance of Americans. Though the sale of cars in the U.S. has steadily increased every year from 2009 to 2014, it is likely to be a few more years until the auto industry experiences a full recovery. Despite volatility in revenue for these producers, large automobile companies plan ahead of time for periods of low-sale growth and decline. For this reason, the likes of Ford and GM should be considered by cyclical investors.

Manufacturing

As wages and average incomes increase in the U.S., there will be higher demand for domestically produced goods. General Electric is likely to improve in tow with the U.S. economy. If China’s economy continues to slow, manufacturing in the U.S. may experience a renaissance. The tolerance that consumers in the U.S. have for lower-priced goods made abroad is a reflection of consumer demand. The manufacturing industry began diminishing in the U.S. in response to the swell of imports of low-priced goods from China and other countries.

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