What Are Cyclical Stocks, and Should I Buy Any?

Simply explained, cyclical equities are those that are significantly impacted by broad-based changes in the entire economy. They often sell luxuries, which are frequently purchased more during boom times and less during downturns.

Cyclical equities are erratic and may reflect broader economic developments. During a recession, non-cyclical equities beat the market. Companies with cyclical stocks provide products and services, such as luxury items, that people tend to purchase when the economy is doing well but reduce during recessions.

Expansion, peak, recession, and recovery are the four different phases of the average economic cycle. Cyclical stocks closely mimic this cycle. People often have more money to spend on discretionary items when the economy is expanding. This will continue until the peak, and at these times, cyclical equities can see tremendous gains.

However, when the economy weakens and decelerates into a recession, consumers will frequently start to cut back on these non-essential costs. When spending stops, these stocks may start to decline quickly. In extreme circumstances, the decline may be so significant that once-profitable businesses may potentially fail.