Defensive vs. cyclical stocks
During times of economic volatility, it’s not uncommon to hear the terms “cyclical” and “defensive” used in reference to stocks. But what exactly do these terms mean?
The terms cyclical and defensive refer to how sensitive a company’s stock price is to changes in the economy. A cyclical stock’s performance is more highly correlated to the economy. As a group, cyclical stocks tend to perform well when the economy is healthy and suffer during times of recession. Cyclical stocks include companies in the auto, steel, and chemical industries, for example.
Defensive stocks, on the other hand, include companies that make the staple products consumers need and rely on, no matter how the economy is faring. These include utility, pharmaceutical, food, and beverage companies. You may hear defensive stocks referred to as non-cyclical stocks.
Since cyclical stocks reflect more “luxury” items versus necessities, they are often more volatile. Investors may try to time the market by purchasing these stocks at a low price and holding on to them until the economy rebounds. Investors looking to minimize volatility in their portfolio may wish to stick with defensive stocks, which are typically more stable.
No stock investment is without risk, so you should discuss your tolerance for risk with your investment professional before investing in the stock market.
Article provided by Michael P. “Perry” Grice, Associate Vice President/ Investments with Stifel, Nicolaus & Company, Incorporated, member SIPC and New York Stock Exchange, who can be contacted in the Florence, South Carolina office at (843) 665-7599.