Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Consumer Cyclical

What it is:

Consumer cyclical refers to a stock or group of stocks that are affected by changes in the economic cycle.

How it works (Example):

Consumer cyclicals perform well when the economy grows and suffer when the economy stagnates or shrinks. When jobs are scarce and disposable income is lower, people tend to hold off on purchasing cars, traveling or buying new homes. But when employment is high and wages increase, these stocks often shine. This is why the automotive, construction, heavy equipment and airline stocks are examples of cyclical stocks.

Consumer cyclicals can really suffer during recessions (which can last for years), and companies in these industries are prone to bankruptcy if they don't have the cash or strong balance sheets necessary to weather a long recession. However, the bigger the economic boom, the more profitable these stocks become.

Why it Matters:

Investors attracted to consumer cyclicals face the arduous task of trying to time the market -- that is, to predict where the bottom of the business cycle is in order to buy these stocks at the optimal time and then predict where the top of the cycle is in order to sell at the optimal time. Some academic studies indicate that changes in interest rates are the best aid to market timing in this regard.

Regardless, timing the market can be hard, given the fact that some consumer cyclicals start bouncing back before a recession ends. Holding the stock of companies in cyclical industries over the long-term is therefore a somewhat controversial issue because economic downturns can take years to recover from.

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