What are cyclical stocks?
They are stocks that belong to a company that produces a particular good or service and where the stock price fluctuates depending on whether the economy is doing well or not. So when the economy is booming, cyclical stocks will increase. When the economy is in a recession, however, they will decrease.
For example, holiday companies – such as airlines and holiday agents – typically rely on the economy doing well for people to book them (because if you’re strapped for cash during a recession, booking a holiday wouldn’t be on top of your priorities, would it?!). That means that when the economy takes a hit, the stocks of holiday companies will take a hit too. In a nutshell, cyclical stocks are more prone to volatility.
Cyclical stocks are distinguishable from non-cyclical stocks which belong to companies that produce consumer staple products we need, such as toothpaste, soap, oil, salt, potatoes and so on...this means the stock value is way less turbulent, regardless of the overall economic performance. But we won’t get into that here…
- Cyclical stocks are correlated with macroeconomic cycles
- They go up when the economy is doing well and down when the economy is in a recession
- Cyclical stocks belong to a companies that produce a particular good or service which people won't prioritise buying when the economy is down
- Examples of cyclical stocks include luxury cars, airlines and restaurants
Investing in cyclical stocks
Due to the uncertainty surrounding cyclical stocks, it is important to time your purchase well – and that’s hard to do. If someone purchases a cyclical stock at the wrong stage of a cycle, for example, the stock could plummet and it could take years to get it back to the price at which you bought it. That being said, there are lots of potential gains to make if you time it well. For example, those who invested in Tesla before the pandemic would have seen their stocks skyrocket during 2020. If you decide to invest in cyclical stocks, proceed with caution – research and timing is everything and there are no guarantees.
Cyclical stock examples
- Airlines: When the economy is booming, people have more financial means to book a holiday abroad.
- Hotels: The same goes for hotels which rely on people having the means to travel.
- Retail: Retail outlets will see a decrease in sales during economic freezes when people have less money to spend.
- Restaurants: Restaurant stocks take a hit when more people dine at home to save extra cash during the week.
- Technology: Individuals and businesses are less inclined to fork out on the latest technologies and electronic devices during recessions.
Companies that have cyclical stocks
Want to know what sort of companies hold cyclical stocks? Here’s some examples for you:
Netflix: £50 billion was wiped from Netflix’s value when a large portion of subscribers decided to terminate their subscription from the streaming service. There were many reasons why subscribers quit, but one reason is because the streaming giant upped their prices during a period when the economy wasn’t doing great.
Walt Disney: During recessions, Walt Disney is one of the companies likely to take a hit. During the Covid-19 pandemic, for example, people were unable to travel to the resorts where large sums of the company’s profit is made. But as travel restrictions eased, stocks went back up.
Ford: An automotive company, like Ford, is cyclical because cars have a certain life-span and people have to purchase a new one every few years. In a recession, most people will try to stretch out their life-span and attempt to use the one they have until it’s on its last legs!