What are cyclical stocks?

What do cyclical stocks mean? Cyclical stocks’ price performance tends to be most hit by the changes in the economic cycle, following the periods of expansion, peak, contraction and trough.

Cyclical stocks explained

Consumer discretionary sector companies tend to make up the majority of cyclical stocks as consumers tend to buy their products during expansionary mode of the cycle. These companies include retailers, leisure and travel agencies, airlines, automobiles, hotels and restaurants. 

Some examples of cyclical stocks include entertainment company Walt Disney (DIS), online travel shopping company Expedia Group (EXPE), carmaker General Motors (GM).

Stocks in the oil and gas sector also tend to be cyclical due to their dependence on global demand. This means investors could have to go through booms and busts of an economic cycle if they choose to invest in the oil and gas sector. 

Cyclical stocks are also called offensive as investors use them to get higher returns during the booming cycle, when the markets move upward. 

The key reason behind the cyclical nature of these stocks is that during a booming economic cycle demand expands faster than supply, pushing the price up. However, it should be noted that oil and gas prices are subject to fluctuations driven by other factors such as geopolitical climate. 

Cyclical vs defensive stocks

In contrast to cyclical stocks, defensive stocks tend to outperform the broader market during a recession. For example, consumer staples such as utilities, and healthcare companies are considered of defensive nature as their products are of an essential nature and are not affected by changes in economic conditions.