If you’re confused about the terminology you’re not alone: I was at first! Here are some definitions and guidlines
It’s a type of industry that is sensitive to the business cycles, such that revenues are generally higher in periods of economic prosperity, and lower in economic downturn. Cyclical stocks follow an upward trend when businesses and consumers are spending money.
Companies in cyclical industries can deal with volatility by implementing cuts to compensations and layoffs during bad times, and paying bonuses and hiring in good times. In good economic conditions, businesses expand, they buy new equipment and build new facilities. Moreover, people have more disposable income and therefore, more willing to spend money on vacations, air travel, purchasing cars, etc,.
The Cyclical Consumer Goods & Services economic sector consists of companies engaged in the production of automobiles, home building, household goods, textiles and apparel, as well as hotel, casino, leisure, media and retail operations and services. Cyclical industries also include companies that produce durable goods such as raw materials & heavy equipment, equipment sales & construction, steel manufacturing, airlines.
It’s a type of industry that is sort of immune to business cycles. Non-Cyclical Stocks or defensive stocks do well in economic downturns, since demand for their products and services continues regardless of the economy. When the economy is growing, these stocks tend to lag behind, however during economic downturns; their steady returns may look good. The Non-Cyclical Consumer Goods and Services economic sector consists of companies engaged in fishing and farming operations; the processing and production of food, beverages and tobacco; manufacturers of household and personal products; and providers of personal services, utilities. Everyone from consumers to businesses needs water, gas, and electricity…
Cyclical stocks represent those items and services for consumers and businesses that they buy when confidence in the economy is high.
Non-cyclical stocks represent those items and services for consumers and businesses that they can’t put off no matter what the state of the economy.
For investors wanting a more conservative posture, non-cyclical stocks – many of which also pay nice dividends – should make up part of your portfolio.
Understand this- relative safety comes with a price like missing growth opportunities in an up market.