Cyclical Stocks: Definition, Risks, and Examples

Cyclical stocks are shares of companies whose revenues and profits rise and fall with the broader economy. When the economy expands, demand for discretionary goods and services typically increases, boosting these companies’ sales and stock prices. During recessions, consumers cut back on nonessential spending, and cyclical stocks often suffer sharper declines than the market.

Key takeaways

• Cyclical stocks move with the business cycle: expansion, peak, recession, and recovery.
• Common sectors: autos, travel and leisure, retail, consumer discretionary goods, hotels, and restaurants.
• They tend to be more volatile than defensive (noncyclical) stocks but can offer higher returns during economic upswings.
• Diversifying with defensive stocks or using sector ETFs can help manage risk.

How cyclical stocks respond to economic changes

• In expansions: consumers spend more on big-ticket and discretionary items (new cars, home upgrades, travel, entertainment), lifting sales for cyclical companies.
• In recessions: discretionary purchases are among the first expenses consumers trim, which can sharply reduce revenue and push cyclical stocks down—sometimes severely.
• Some investors attempt to time the cycle by buying cyclicals at troughs and selling at peaks, but timing is difficult and risky.

Risks and benefits

Benefits
* Potential for outsized gains during sustained economic growth.
* Exposure to sectors that can recover strongly after downturns.

Risks
* Higher volatility versus defensive stocks.
* Greater sensitivity to macroeconomic shocks—earnings and valuations can swing widely.
* Company-specific risk in severe downturns (bankruptcy potential for weaker firms).

Strategies to manage risk
* Balance cyclical holdings with defensive stocks (consumer staples, utilities, healthcare).
* Use ETFs focused on consumer discretionary or cyclical sectors to gain diversified exposure (e.g., Consumer Discretionary sector ETFs).
* Monitor portfolio weightings and macroeconomic indicators rather than overconcentrating in cyclicals.

Cyclical vs. noncyclical (defensive) stocks

• Cyclical stocks correlate strongly with economic growth. Performance rises in expansions and falls in contractions.
• Noncyclical (defensive) stocks provide goods and services people need regardless of the economy—examples include food, household products, and utilities. These tend to be more stable during downturns and help hedge portfolio losses from cyclicals.

Examples by industry

Durable goods (longer-lived items)
* Automakers: Ford
* Appliances and furniture: Whirlpool, Ethan Allen
* Indicator: Durable goods orders can signal near-term economic momentum.

Nondurable goods (shorter-lived consumer goods)
* Beverage and consumer products: Coca‑Cola, Procter & Gamble

Services (travel, leisure, entertainment)
* Theme parks and media: Walt Disney
* Streaming: Netflix
* Travel and lodging: airlines, hotels, online travel platforms

Other cyclical examples
* Retailers (discretionary-focused chains)
* Restaurants and hospitality
* Transportation and logistics tied to consumer demand

Income from stocks

• Stocks provide two main cash-return mechanisms:
• Dividends: regular cash payments if declared by the company.
• Capital gains: profits realized by selling shares for more than the purchase price.
• Cyclical companies may cut or suspend dividends during downturns; dividend reliability is generally greater among defensive companies.

What are “best” cyclical stocks?

There is no universally “best” cyclical stock—suitability depends on your investment goals, risk tolerance, time horizon, and sector outlook. Analysts and financial sites highlight names like Costco, Expedia, UPS, Airbnb, and Kohl’s as cyclical opportunities at various times, but these are examples for further research, not recommendations.

Counter-cyclical stocks

Counter-cyclical (or anti-cyclical) stocks tend to perform better when the economy is weakening. Their prices may rise when macro conditions worsen, offering potential diversification benefits during recessions.

Conclusion

Cyclical stocks offer the potential for significant gains during economic expansions but come with elevated volatility and macro sensitivity. A balanced approach—combining cyclical exposure with defensive holdings, using ETFs for diversified sector access, and managing portfolio weights—can help investors pursue growth while mitigating downside risk.