Cyclical stocks are a category of stocks whose prices are influenced by broader macroeconomic or systematic changes in the overall economy. These stocks are known for their sensitivity to economic cycles, which typically include phases like expansion, peak, recession, and recovery.
Cyclical stocks often belong to companies operating in industries that are closely tied to consumer and business spending patterns. They tend to perform well during economic expansions when consumer and business confidence is high. This is because consumers and businesses are more likely to spend on discretionary items, such as travel, automobiles, and luxury goods, during periods of economic growth.
Conversely, during economic downturns or recessions, cyclical stocks may underperform. This is because consumers and businesses tend to cut back on non-essential expenditures during economic downturns, impacting the profitability of companies in cyclical industries.
Some common examples of cyclical industries include automotive, travel and leisure, construction, and retail. Investors often monitor economic indicators and forecasts to gauge the performance of cyclical stocks, as their fortunes are closely tied to the overall health of the economy.