Cyclical Stock

What Is a Cyclical Stock?

A cyclical stock is one whose price is affected by macroeconomic or systemic changes in the overall economy. These stocks also follow the cycles which an economy goes through like expansion, peak, recession, and recovery.

Most cyclical stocks are of companies that sell products that sell more during a booming economy and less during a recession period.

Cyclical stocks are more volatile than non-cyclical or defensive stocks, which remain stable during periods of economic growth. But investing in cyclical stocks offers greater potential for growth as they outperform other stocks during periods of economic strength in the economy.

Portfolios with a mix of cyclical stocks and defensive stocks balance out the former’s volatility with long term growth of the latter.

Cyclical stocks are generally the opposite of defensive stocks and include companies like Starbucks or Nike.

Understanding Cyclical Stocks

Car manufacturers, airlines, furniture retailers, clothing stores and hotels and restaurants are businesses that can be considered as cyclical. This is because people can afford to buy new cars, upgrade their homes, shop and travel during an economic boom.

Consumers cut out discretionary expenses the moment the economy suffers from recession. So in the worst case scenario, cyclical stocks may even become worthless, and companies may become bankrupt.

Investors should try to include cyclical stocks in their portfolio to make the most of the gains during a boom, but should also be careful about their positions and monitor them closely.

Cyclical stocks are somewhat predictable as they rise and fall with economic cycle. So, investors tend to buy these shares at a low point and sell them at a high point.

Advantages of Cyclical Shares

  • Massive Growth – The value and prices of cyclical stocks skyrocket during a boom in the economy as they reflect confidence of consumers  in such companies when the economy is growing.
  • Right buy leads to great returns – Investment just before the boom period in an economy can lead investors to amass enormous gains when the stocks start doing well.
  • Stimulus During Falling Interest Rates – Cyclical stocks have better valuations when interest rates are falling in the economy. Low Interest costs and increased earnings are further reflected in the stock price.
  • More Volatile than Market Benchmark – Investments in sectors which are dependent on the economic strength of the country, such as the technology or the real estate sector, will be able to generate returns above the market benchmark.
  • Reflective of Business Sentiment – Cyclical stocks mirror the business cycle and investors can analyse the direction of the economy by understanding the movement of cyclical stocks.

Cyclical Stock

Limitations of Cyclical Securities

  • Major Fall during Times of Recession – Cyclical stocks witness a significant fall in value during times of recession and investors who are not able to manage their investments before the onset of economic decline have to face harsh consequences.
  • Timing Matters – Timing for buying and selling cyclical stocks is of immense importance as mistakes in doing so may lead to investors suffering huge losses. In-depth research and analysis should be done before investing in such stocks.
  • High Volatility – The high volatility of the stocks may be frustrating for investors who prefer stability in their portfolio.  The stocks have a tendency to go far below the benchmark leading to poor returns for investors.
  • Requires in depth Research and Analysis – The volatile nature of cyclical stocks can be understood by deep research and analysis. So, one should spend sufficient time and follow the trends in the market to predict upcoming signs and make the right decisions pertaining to the buying and selling of the stocks.
  • Not suitable for Passive Investors – Investment in cyclical stocks requires constant monitoring of the market trends and being active with the buying and selling to maximize earnings. But long term and passive investors lack that commitment and effort. If cyclical stocks are held in a recession, they cause significant erosion to the value of the holdings.

Cyclical Vs Non-Cyclical Stocks

The performance of cyclical stocks correlates with the economy, which isn’t the case with non-cyclical stocks. Non-cyclical stocks are also called defensive stocks and tend to do well even when there’s a slowdown in the economy.

Companies providing food, gas, and water like Walmart are non-cyclical stocks. Investing in non-cyclical stocks is a sound strategy to offset losses sustained from cyclical stocks during an economic recession.

When to Invest in Cyclical Shares?

Cyclical stocks fare poorly when interest rates are rising and do best when interest rates are falling as such rates stimulate the economy. But investors should also refrain from buying in the first year of falling interest rates.

Cyclical stocks should be bought right before a slump and should be sold when there is upward movement in the economy. Choosing good quality cyclical shares with robust financials helps in making huge gains.

Market savvy investors should keep track of market trends and cyclical shifts which take place in many sectors. One can buy cyclical stocks during the recovery period and exit when the cycle is reversed.

Frequently Asked Questions

Durables, nondurables, and services sectors showcase cyclical stocks. Durable goods companies manufacture or distribute physical goods that have a life span of more than three years. The strength of durable goods orders indicates stronger activity in the economy. Ford, Whirlpool, IKEA are some companies that operate in this segment.

Nondurable goods companies produce or distribute soft goods with a life span of less than three years. Nike, Target are companies in this segment.

Services do not manufacture or distribute physical goods but provide services that facilitate leisure activities for consumers. Walt Disney, Netflix operate in this segment.

Basic materials, consumer cyclical, financial services, and real estate are some of the market sectors which are cyclical in nature.

Tesla would be considered a cyclical stock because people would forgo buying cars during a recession.

Amazon would be considered a non-cyclical stock as it provides groceries and other essential services which people would have to avail even during a recession.

    Read the Latest Market Journal

    What is CFD? With 2 Practical Examples

    Published on May 15, 2024 74 

    In this article, you will learn what CFD (Contract for Difference) is, the costs and...

    What is ESG investing, and why is it important?

    Published on May 15, 2024 65 

    Over the last five years, Environmental, Social, and Governance (ESG) investing has evolved from being...

    What are fixed-income funds?

    Published on May 15, 2024 36 

    In the diverse world of unit trusts, various funds employ distinct investment strategies aligned with...

    Hong Kong Value Stocks Q2 2024

    Published on May 14, 2024 97 

    After a long period of sluggishness, Hong Kong market has begun to pick up. The...

    Weekly Updates 13/5/24 – 17/5/24

    Published on May 13, 2024 43 

    This weekly update is designed to help you stay informed and relate economic and company...

    The 5 Levels of Mindset to Achieve FIRE

    Published on May 9, 2024 115 

    Imagine a life where you feel financially secure, confident, and at peace. A life where...

    Weekly Updates 6/5/24 – 10/5/24

    Published on May 6, 2024 71 

    This weekly update is designed to help you stay informed and relate economic and company...

    Weekly Updates 29/4/24 – 3/5/24

    Published on Apr 29, 2024 40 

    This weekly update is designed to help you stay informed and relate economic and company...

    Contact us to Open an Account

    Need Assistance? Share your Details and we’ll get back to you

    IMPORTANT INFORMATION

    This material is provided by Phillip Capital Management (S) Ltd (“PCM”) for general information only and does not constitute a recommendation, an offer to sell, or a solicitation of any offer to invest in any of the exchange-traded fund (“ETF”) or the unit trust (“Products”) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. You should read the Prospectus and the accompanying Product Highlights Sheet (“PHS”) for key features, key risks and other important information of the Products and obtain advice from a financial adviser (“FA“) pursuant to a separate engagement before making a commitment to invest in the Products. In the event that you choose not to obtain advice from a FA, you should assess whether the Products are suitable for you before proceeding to invest. A copy of the Prospectus and PHS are available from PCM, any of its Participating Dealers (“PDs“) for the ETF, or any of its authorised distributors for the unit trust managed by PCM.  

    An ETF is not like a typical unit trust as the units of the ETF (the “Units“) are to be listed and traded like any share on the Singapore Exchange Securities Trading Limited (“SGX-ST”). Listing on the SGX-ST does not guarantee a liquid market for the Units which may be traded at prices above or below its NAV or may be suspended or delisted. Investors may buy or sell the Units on SGX-ST when it is listed. Investors cannot create or redeem Units directly with PCM and have no rights to request PCM to redeem or purchase their Units. Creation and redemption of Units are through PDs if investors are clients of the PDs, who have no obligation to agree to create or redeem Units on behalf of any investor and may impose terms and conditions in connection with such creation or redemption orders. Please refer to the Prospectus of the ETF for more details.  

    Investments are subject to investment risks including the possible loss of the principal amount invested. The purchase of a unit in a fund is not the same as placing your money on deposit with a bank or deposit-taking company. There is no guarantee as to the amount of capital invested or return received. The value of the units and the income accruing to the units may fall or rise. Past performance is not necessarily indicative of the future or likely performance of the Products. There can be no assurance that investment objectives will be achieved.  

    Where applicable, fund(s) may invest in financial derivatives and/or participate in securities lending and repurchase transactions for the purpose of hedging and/or efficient portfolio management, subject to the relevant regulatory requirements. PCM reserves the discretion to determine if currency exposure should be hedged actively, passively or not at all, in the best interest of the Products.  

    The regular dividend distributions, out of either income and/or capital, are not guaranteed and subject to PCM’s discretion. Past payout yields and payments do not represent future payout yields and payments. Such dividend distributions will reduce the available capital for reinvestment and may result in an immediate decrease in the net asset value (“NAV”) of the Products. Please refer to <www.phillipfunds.com> for more information in relation to the dividend distributions.  

    The information provided herein may be obtained or compiled from public and/or third party sources that PCM has no reason to believe are unreliable. Any opinion or view herein is an expression of belief of the individual author or the indicated source (as applicable) only. PCM makes no representation or warranty that such information is accurate, complete, verified or should be relied upon as such. The information does not constitute, and should not be used as a substitute for tax, legal or investment advice.  

    The information herein are not for any person in any jurisdiction or country where such distribution or availability for use would contravene any applicable law or regulation or would subject PCM to any registration or licensing requirement in such jurisdiction or country. The Products is not offered to U.S. Persons. PhillipCapital Group of Companies, including PCM, their affiliates and/or their officers, directors and/or employees may own or have positions in the Products. Any member of the PhillipCapital Group of Companies may have acted upon or used the information, analyses and opinions herein before they have been published. 

    This advertisement has not been reviewed by the Monetary Authority of Singapore.  

     

    Phillip Capital Management (S) Ltd (Co. Reg. No. 199905233W)  
    250 North Bridge Road #06-00, Raffles City Tower ,Singapore 179101 
    Tel: (65) 6230 8133 Fax: (65) 65383066 www.phillipfunds.com