What are '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 that people consume quickly such as cleaning supplies, clothing or food.

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 increases. Companies in the retail and leisure sector include General Motors Company, Walt Disney Company and Priceline.com.

Consumer Spending Sensitivity

Consumer cyclical companies, also referred to as consumer discretionary companies, are particularly exposed to fluctuations in 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 non-essentials, for example, flat screen televisions, vacations, new clothes and new cars. Consumer confidence is an important gauge of consumers’ attitudes toward 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, the sector 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 cushion the downside movement of consumer cyclical stocks. Examples of companies with a long history of dividend payments include Wal-Mart Stores Incorporated, Lowes Corporation, Genuine Parts Company and Target Corporation.

RELATED TERMS
  1. Cyclical Industry

    A cyclical industry is sensitive to the business cycle, meaning ...
  2. Cyclical Unemployment

    A factor of overall unemployment that relates to the cyclical ...
  3. Consumer Goods

    Products that are purchased for consumption by the average consumer. ...
  4. Consumer Sentiment

    Consumer sentiment is astatistical measurement and economic indicator ...
  5. Personal Income And Outlays

    Personal Income and Outlays is a group of two data points produced ...
  6. Discretionary Income

    The amount of an individual's income that is left for spending, ...
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. Investing

    Mattel Stock: 4 Things to Watch (MAT)

    Here are the four leading economic indicators that could affect shares of Mattel Inc. in the next six months, but which ones will have the most impact?
  6. Investing

    IYC Vs. VCR: Comparing Consumer ETFs

    Learn how the consumer discretionary sector is poised to rise. Discover analyses, similarities and differences of two consumer ETFs to consider in 2016.
  7. Trading

    2017 Could Be the Year for Consumer Discretionary Stocks

    Bullish chart patterns on the charts of consumer discretionary assets suggest that higher prices could be in the cards for 2017.
  8. Insights

    Evaluating Grocery Store Stocks

    Retail grocers are no longer a homogeneous group selling products in the same manner. Find out how to evaluate these companies.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. What happens to the intangible assets of a company when it is bought or sold?

    Discover the best-performing stock market sectors over the past five years and learn which sectors continue to offer high ... Read Answer >>
  4. How does market share affect a company's stock performance?

    Discover how market share affects a company's performance. Market share is important in cyclical industries and not important ... Read Answer >>
  5. How are industrial goods different from consumer goods?

    Understand the difference between industrial goods and consumer goods, and learn the different types of industrial goods ... Read Answer >>
  6. Consumer Confidence Vs. Consumer Sentiment

    Is there any real difference between consumer confidence and consumer sentiment? Read Answer >>
Hot Definitions
  1. Working Capital

    Working capital, also known as net working capital is a measure of a company's liquidity and operational efficiency.
  2. Bond

    A bond is a fixed income investment in which an investor loans money to an entity (corporate or governmental) that borrows ...
  3. Compound Annual Growth Rate - CAGR

    The Compound Annual Growth Rate (CAGR) is the mean annual growth rate of an investment over a specified period of time longer ...
  4. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  5. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  6. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
Trading Center