Loading the player...

What is 'Cyclical Stock'?

A cyclical stock is an equity security whose price is affected by the ups and downs in the overall economy. Cyclical stocks typically relate to companies that sell discretionary items consumers can afford to buy more of in a booming economy and cut back on during a recession. Contrast cyclical stocks with consumer staples, which people continue to demand even during an economic downturn.

BREAKING DOWN 'Cyclical Stock'

Cyclical stocks rise and fall with the business cycle. This seeming predictability in the movement of these stock's prices leads some investors to attempt to time the market. They buy the stocks at the low point in the business cycle and sell them at the high point. Examples of companies whose stocks are cyclical include car manufacturers, airlines, furniture retailers, clothing stores, hotels and restaurants. When the economy is doing well, people can afford to buy new cars, upgrade their homes, shop and travel. When the economy is doing poorly, these discretionary expenses are some of the first things consumers cut. If a recession is bad enough, cyclical stocks can become completely worthless as companies go out of business.

Examples of Consumer Cyclical Stocks

The category of consumer cyclical stocks can be further divided into durables, non-durables and services.

Durable goods companies are involved in the manufacture or distribution of physical goods that have an expected lifespan of more than three years. Companies that operate in this segment include automakers such as Ford Motor Company, appliance manufacturers such as Whirlpool Corporation and furniture makers such as Ethan Allen Interiors Inc. The measure of durable goods orders is an indicator of future economic performance. When durable goods orders are up in a particular month, it may be an indication of stronger economic activity in the ensuing months.

Non-durable goods companies produce or distribute soft goods that have an expected lifespan of fewer than three years. Examples of companies operating in this segment are sports apparel manufacturer Nike Inc. and retail stores such as Nordstrom Inc. and Target Inc.

Services is a separate category of cyclical stocks because these companies do not manufacture or distribute physical goods. Instead, they provide services that facilitate travel, entertainment and other leisure activities for consumers. Walt Disney Company is one of the best-known companies operating in this space, but it is joined by many companies operating in the new digital space of streaming media, such as Netflix Inc. and Time Warner Inc.

The Role of Cyclical Stocks in a Portfolio

Cyclical stocks are viewed as more volatile than non-cyclical or defensive stocks, which tend to be more stable during periods of economic weakness. However, they offer greater potential for growth because they tend to outperform the market during periods of economic strength. Investors seeking long-term growth with reduced volatility tend to balance their portfolios with a mix of cyclical stocks and non-cyclical stocks.

  1. Cyclical Industry

    A cyclical industry is sensitive to the business cycle, meaning ...
  2. Core Durable Goods Orders

    New orders for U.S. core durable goods, which are the total durable ...
  3. Market Cycles

    Market cycles include four phases of market growth and decline, ...
  4. Consumer Goods

    Products that are purchased for consumption by the average consumer. ...
  5. Big Ticket Item

    A big ticket item is a high-cost item, such as a house or car, ...
  6. Full Employment

    Full employment is a situation in which all available labor resources ...
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. Insights

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive 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. Investing

    The Alphabet Soup Of Stocks

    Are the countless stock categories leaving you puzzled? Here we help you sort through the confusion.
  5. Insights

    Riding The Bear Into A Bull Market

    How can you get back into the market to avoid missing market recovery gains? Find out here.
  6. Investing

    Guard Your Portfolio With Defensive Stocks

    Find out how these securities can protect you from a market bust.
  7. Investing

    Earnings Cyclicality Exposes Profitable Trends

    Learn to explore a company's past profits to find today's opportunities.
  8. Investing

    Investment Portfolio Strategy in Recession

    Do you know what to do when recession hits? Learn these recession-proof strategies that help your portfolio to endure the economic downturn.
  9. 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.
  1. 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 >>
  2. 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 >>
  3. What are the main factors that drive share prices in the automotive sector?

    Find out the various factors that drive share prices in the automotive sector; automakers are cyclical stocks so economic ... Read Answer >>
  4. What is the difference between structural unemployment and cyclical unemployment?

    Learn more about about the differences between structural and cyclical unemployment and when cyclical unemployment becomes ... Read Answer >>
  5. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
Hot Definitions
  1. Liquidity

    Liquidity is the degree to which an asset or security can be quickly bought or sold in the market without affecting the asset's ...
  2. Federal Funds Rate

    The federal funds rate is the interest rate at which a depository institution lends funds maintained at the Federal Reserve ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  4. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  5. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  6. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
Trading Center