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.
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
-
How does the Lifetime ISA work? Key LISA rulesWhat is a Lifetime ISA (LISA) and how much could the government bonus boost your savings by? We look at the perks and the pitfalls.
-
AJ Bell: a fine British fintech going cheapOpinion Don’t overlook investment platform AJ Bell, a significantly undervalued British business with an excellent financial base
