The performance of cyclical stocks is heavily dependent on the economic cycle- they do well when the economy is booming but very badly when it falls off a cliff. A classic example would be housebuilders, all of whom have done well in the UK over the last ten years in a benign environment of low interest rates and high demand. However, when the economy falters, as interest rates and unemployment rise, these shares all take a battering, whether the underlying building company is good or bad.
Counter-cyclical (or 'defensive') stocks, such as utility and tobacco companies, tend to perform consistently whether the economy is doing well or badly. This is largely because they supply a product which is regarded as a staple- people who smoke do so in good and bad times - demand for which is not highly correlated with the state of the broader economy.
A balanced portfolio should contain a mixture of cyclical and non-cyclical stocks which can be altered as the economic climate changes.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
See Tim Bennett's video tutorial: What are defensive stocks?
-
Trouble brews in B&M as bargain shops take a hitOpinion Once a stock market darling, B&M's share price has slumped. What has gone wrong for bargain shops?
-
US and China reach a ceasefire in their trade war after talks in LondonThe US and China's trading relationship – the most important one in the global economy – is back on track. Will the truce last?
