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Cyclical vs. Non-Cyclical Stocks

In order to achieve a balanced portfolio of stocks both cyclical and non-cyclical stocks should be included to achieve the desired diversified portfolio. This should be done in order to be able to better face the changing cycles of the economy and the market as a whole. For instance, if the market moves toward bad conditions, defensive stocks should be used, moving away from the cyclical stocks that respond to the market changes.

Cyclical vs. Non-Cyclical Stocks

Non-cyclical stocks represent goods and services that consumers continue to use no matter what the state of the economy is. For instance, people will not stop using electricity or food just because the economy is in bad mood.

On the other hand, cyclical stocks encompass items that consumers purchase under the conditions of high economy confidence.

It is worth noting that the prices of both cyclical and non-cyclical issues are determined by the cycles of the business. Additionally, cyclical stocks are more responsive to the ups and downs of the market, whereas non-cyclical stocks provide greater protection against the downs of the market.

Cyclical Stocks

The more money the consumers spend, the higher the movement in the cyclical stocks. A typical example is the automobile industry. When the economy is stable and the people enjoy their high incomes, they are more inclined to purchase a new car. On the other hand, if the economy worsens consumers are willing to postpone the purchase of a new car until the conditions are better.

Additionally, under favorable economic conditions businesses are more likely to expand their activities in terms of purchasing new equipment and facilities, which makes the latter falling into the cyclical category. On the other hand, if the economy worsens businesses are less likely to make these improvements.

Non-Cyclical Stocks

Also known as defensive stocks, non-cyclical stocks are famous for their good performance even in bad economic times. This is caused by the fact that the items and services included in this classification enjoy constant consumption by consumers.

A typical example is food consumption. No matter what the conditions of the economy are, people will still consume food to provide for their existence. Another example is the utilities sector. The same applies for electricity, water and gas consumption as for food consumption. However, in good economic times the returns from these stocks may lag behind.

Finally, if you are a more of a conservative type of investor, non-cyclical stocks may be the right choice. However, if you think that you can manage with the observation of the business cycle, cyclical stocks will provide you with good returns.

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