- 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!