Cyclical stocks rise and fall with the economy because their sales depend on discretionary spending (airlines, automakers, hotels, luxury goods), while non-cyclical or defensive stocks sell necessities (food, household goods, utilities) and hold up better in downturns. One quick test is beta against the S&P 500: in this April 2021 example, calculated with MarketXLS in Excel, American Airlines (AAL) had a beta close to 1 and Walmart (WMT) a beta well below 1. Beta is only one signal, so also check how a company's revenue behaved in past recessions.
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**Cyclical Industries Cyclical industries are those that are economically sensitive. This means they follow the ups and downs of the economy as a whole – becoming profitable during periods of prosperity and inactive during downturns.
This cycle is largely down to consumer spending. If a good or service is seen as a discretionary expense – an optional cost – then the companies involved would usually only see profitability if consumers have sufficient incomes. What are Cyclical and Non-Cyclical Stocks?**Cyclical stocks are units of ownership in these companies whose profits depend on the business cycle. The price of cyclical stocks usually rise in periods of economic boom – and can even outperform the wider market. But their value usually falls during downturns, in line with sales and profits.
Common examples of cyclical industries include automobile manufacturers, luxury goods producers, airlines, hotels and restaurants. When consumers have excess capital, they are more likely to make extravagant purchases or go on holidays, but during times of economic hardship, consumers tend to stop spending and start saving.
Non-cyclical stocks – also known as defensive stocks – are the shares of companies that tend to be profitable regardless of the state of the economy. Unlike cyclical stocks, they produce the goods and services that society can’t do without, such as utilities or food companies. This means that the price of defensive stocks will likely remain stable, or even rise, during periods of increased volatility. As a result, investors and traders often use defensive stocks as safe havens or to hedge against falling markets. Non-cyclical stocks have often held up better than the market when economic growth slows.
Non-cyclical stocks examples include stocks of companies manufacturing and selling fast-moving consumer goods, petrol, or electricity, among other things. These products continue to be in demand irrespective of the state of the economy, because people need these products or services on a daily or a regular basis.** Comparison of Stocks with S&P 500 Market Index:**To illustrate the differences between cyclical & non-cyclical stocks, we’ve compared the prices of American Airlines Group Inc. (Airlines Industry) and Walmart Inc. (Consumer Defensive Industry) to the S&P 500 Market Index – a common benchmark for the health of the US economy- from Oct 2020 to Apr 2021, when lockdown restrictions started to ease out worldwide.
** Step 2**: Here I have selected custom beta for 6 months as I want to know what their beta values have been in the last 6 months in relation to the S&P 500 market index. Put the function, select the cell with the ticker name of that stock and press Enter.
** Step 3**: The beta value will appear for the stock. Use flash fill to get the same for all the stocks. To know other important ratios and fundamental data, go to the MarketXLS tab, then to fundamental analysis and select key ratios or fundamental data as per your need.
As we can see the beta for AAL stock is very close to 1 which indicates the impact of economic health on the company. Thus it’s quite clear that this is a cyclical stock.
The beta for WMT stock is much less than 1, indicating that its price moved less with the market, consistent with a non-cyclical stock.
** Diversification can help manage Cyclical Stock Risk:**Cyclical stocks are known for having a better rate of growth than other stocks during periods of economic strength. While non-cyclical industries tend to have stable profits over time, cyclical stocks experience extreme booms and outperform their benchmarks in economic upturns.
To build a portfolio with cyclical stocks – or any stocks for that matter – you need to diversify your exposure. This would mean trading a mix of cyclical and defensive stocks – as well as other asset classes.
During a period of economic prosperity, both types of stocks have the potential to earn you profit. However, if a period of economic downturn did occur, then your defensive stocks would likely offset some of the loss caused by any cyclical stocks you held a position on.** Disclaimer:All trademarks referenced are the property of their respective owners. Other trademarks and trade names may be used in this document to refer to either the entity claiming the marks and names or their products. MarketXLS disclaims any proprietary interest in trademarks and trade names other than its own, or affiliation with the trademark owners.
None of the content published on marketxls.com constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The author is not offering any professional advice of any kind. The reader should consult a professional financial advisor to determine their suitability for any strategies discussed herein. The article is written for helping users collect the required information from various sources deemed to be an authority in their content. The trademarks if any are the property of their owners and no representations are made. Reference:**
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