When and Why to Invest in Cyclical Stocks
A cyclical stock is a stock that tends to rise during good economic times and fall when the economy slows down. The performance of these stocks, and usually the stocks of its competitors, will vary depending on the phase of the business cycle. Identifying cyclical stocks is not difficult as the industries they operate in are cyclical in nature. Automobiles, airlines, financial services, and producers of durables goods are good examples of cyclical industries as they generally tend to follow the performance of the economy as a whole.
Reasons to Consider Investing in Cyclical Stocks
Potential for big gains: For investors with market timing savvy, cyclical stocks can present solid profit opportunities. In fact, the cyclical nature of these types of stocks can provide investors with multiple opportunities to make money on the same securities.
Relatively safe investments: Investors will often confuse cyclical stocks with high-risk, but the cyclical stocks of large, well-established companies can be a relatively low-risk strategy.
Opportunity for diversification: There are numerous cyclical stocks to choose from among many different industries, enabling cyclical stock investors to spread their risk.
When to invest in Cyclical Stocks
Successful investing in cyclical stocks is largely about timing and correctly predicting an upswing in the economy. Falling interest rates can provide an initial indication of a near-term economic upturn since consumers and businesses are encouraged to spend due to the availability of money at low cost. Investors should beware, though, that there may be a considerable lag time between the rate cut and a momentum change in the economy. It’s also important for investors to not only select the right industry, but the company within that industry that has positioned itself best for success.
Cyclical stock investors should also have a good exit strategy as it may make sense to get out of these stocks again when the economy seems headed for a downturn. Cyclical stocks are usually not a good choice for a buy and hold strategy.
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.
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