Cyclical stocks are stocks that tend to follow the business cycle, meaning their prices and earnings tend to rise and fall with the overall economy. These stocks are typically associated with companies in industries sensitive to economic changes, such as consumer discretionary items, energy, financials, and materials. Examples of cyclical stocks include:

Automobile manufacturers

Automobile stocks are often referred to as “cyclical stocks” because the demand for automobiles tends to fluctuate in a regular or “cyclical” pattern. A cyclical stock is a stock whose performance is closely tied to the economy’s overall health and tends to rise and fall with the business cycle.

When the economy is strong, people tend to have more disposable income and are more likely to purchase big-ticket items such as cars. This results in increased demand for automobiles and increased profitability for automobile companies. On the other hand, when the economy is weak or in recession, people tend to cut back on discretionary spending, leading to decreased demand for automobiles and profitability for automobile companies.

The sales of cars are also affected by interest rates, credit availability, and consumer sentiment. These factors can also impact the performance of automobile stocks. As these factors are closely tied to the economy’s overall health, the stock prices of automobile companies tend to fluctuate in a cyclical pattern, hence the name “cyclical stocks.”

Homebuilders

When the economy is strong and growing, people tend to have more disposable income and are more likely to purchase homes. This results in increased demand for new homes and increased profitability for homebuilder companies. On the other hand, when the economy is weak or in recession, people tend to cut back on discretionary spending, leading to decreased demand for new homes and decreased profitability for homebuilder companies.

Homebuilder stocks are also sensitive to other economic factors such as interest rates, consumer sentiment, and credit availability. These factors can also impact the performance of homebuilder stocks. As these factors are closely tied to the economy’s overall health, the stock prices of homebuilder companies tend to fluctuate in a cyclical pattern.

Additionally, home builder stocks are also sensitive to the housing market cycle, which is the up-and-down movement of housing prices, new housing starts, and home sales. When the housing market is strong, homebuilder stocks tend to perform well, but when the housing market is weak, homebuilder stocks tend to struggle.

Retailers

Retail stocks are considered cyclical because the performance of retail companies is closely tied to the economy’s overall health and tends to rise and fall with the business cycle.

When the economy is in a healthy state, people tend to have more disposable income and are more likely to spend on discretionary items such as clothing, electronics, and home goods. This results in increased demand for retail goods and increased profitability for retail companies. On the other hand, when the economy is weak or in recession, people tend to cut back on discretionary spending, leading to decreased demand for retail goods and decreased profitability for retail companies.

Retail stocks are also sensitive to other economic factors, such as interest rates, consumer sentiment, and credit availability. These factors can also impact the performance of retail stocks.

Airlines

When the economy is strong and growing, people tend to have more disposable income and are more likely to travel for leisure or business. This results in increased demand for airline services and increased profitability for airline companies. On the other hand, when the economy is weak or in recession, people tend to cut back on discretionary spending, leading to decreased demand for airline services and decreased profitability for airline companies.

Airlines stocks are also sensitive to other economic factors, such as fuel prices, consumer sentiment, and credit availability. These factors can also impact the performance of airline stocks. As these factors are closely tied to the economy’s overall health, airline companies’ stock prices tend to fluctuate in a cyclical pattern, hence the name “cyclical stocks.”

It’s also important to note that the airline industry is affected by various other factors, such as natural disasters, political instability, and even pandemics, that can cause travel disruptions and hit the airline industry hard.

Oil and gas companies

When the economy is growing, demand for energy increases as more businesses and consumers use energy to fuel their activities. This results in increased demand for oil and gas and increased profitability for oil and gas companies. On the other hand, when the economy is weak or in recession, demand for energy decreases as businesses and consumers cut back on their activities. This can lead to reduced demand for oil and gas and decreased profitability for oil and gas companies.

Oil and gas stocks are also sensitive to other factors, such as global political events, natural disasters, and fluctuations in oil and gas prices which can impact the performance of the companies and their stock prices. Additionally, the oil and gas industry is affected by shifts in global energy demand and supply and technological developments such as the increasing use of renewable energy sources.

Another reason why oil and gas stocks are considered cyclical is that they are subject to the commodity cycle. Oil and gas prices are highly correlated with the economic cycle, as oil and gas prices tend to rise when the economy is expanding and fall when the economy is contracting.

Banks

When the economy is strong and growing, banks tend to benefit from increased lending and borrowing activity and higher interest rates on loans. This results in increased profitability for banks. On the other hand, when the economy is weak or in recession, banks tend to suffer from decreased lending and borrowing activity and lower interest rates on loans. This can lead to reduced profitability for banks.

Banks stocks are also sensitive to other economic factors, such as consumer sentiment, credit availability, and government policies. For example, tighter regulations and oversight can increase business costs for banks and reduce profitability, while looser regulations can have the opposite effect.

Another reason why bank stocks are considered cyclical is that banks are subject to the credit cycle. Banks stocks tend to be highly correlated with the credit cycle, which is the up-and-down movement of credit quality and availability. Banks tend to be profitable when credit is readily available, and their stock prices increase, but when credit is tight, banks tend to struggle, and their stock prices decrease.

It’s important to note that the stock market is not always predictable, and past performance is no guarantee of future results; it’s always recommended to consult a financial advisor before making any investment decisions.

Cyclical stocks can offer higher returns during periods of economic growth, but they also carry more risk during recessions or economic downturns. As a result, investors may consider investing in cyclical stocks during economic growth and moving to defensive stocks during economic downturns.

It’s important to note that even if a company is considered a cyclical stock, other factors, such as company-specific news or industry-specific trends, could affect the stock’s price. Therefore, conducting thorough research and consulting with financial advisers or professionals is essential before making investment decisions.