Cyclical stocks are the shares or assets of companies whose financial performance and profitability are closely linked to economic cycles. These companies experience marked fluctuations in earnings and share price as a function of the different phases of the economic cycle: expansion, recession, recovery or slowdown.

What is a cyclical value?

So-called “cyclical” companies supply goods or services that are generally in greater demand during periods of economic growth, and less in times of slowdown or recession. As a result, their sales and profitability rise when the economy is expanding, and fall when the economy goes into recession.

Typical examples of cyclic values :

• Automotive: Car sales are strongly influenced by consumer confidence. In times of economic growth, people are more inclined to buy new vehicles.
• Construction: Real estate and construction-related businesses (building materials, equipment, etc.) thrive when the economy is doing well and investment is on the rise.
• Tourism and leisure: Demand for travel, hospitality and leisure services increases in times of economic prosperity.
• Heavy industry: Companies producing capital goods or raw materials are sensitive to economic cycles, as their business depends on corporate investment and infrastructure projects.

Behavior of cyclical stocks in economic phases

1. In times of economic growth: cyclical stocks tend to outperform. When the economy is expanding, consumers spend more, companies invest more, and demand for cyclical products and services increases. This leads to higher profits for these companies, and therefore to higher share prices.
2. During a recession or slowdown: Conversely, during a phase of economic contraction, demand for non-essential goods and services declines. Consumers and businesses postpone or reduce their spending, which affects cyclical companies. Their profits fall, and their shares generally follow suit.

Difference with defensive stocks

In contrast to cyclical stocks, defensive stocks are shares in companies whose performance is relatively stable, regardless of economic conditions. They often come from sectors offering essential goods and services, such as food, utilities (electricity, water, gas) or healthcare. These sectors are less sensitive to changes in economic conditions, as their products and services are always in demand, even in times of recession.

Investment strategies

Investing in cyclical stocks can offer interesting opportunities, especially when the economy is recovering or growing. Cyclical stocks tend to rise rapidly, often more than defensive stocks.

However, in times of economic slowdown, these stocks can suffer significant declines. This is why investors need to pay close attention to economic cycles and anticipate phase changes to adjust their portfolios. Some investors adopt a “pro-cyclical” strategy, increasing their exposure to cyclical stocks during an economic upturn and reducing this exposure before an expected recession.