The stock market is like a military campaign in a way: one strategy is not enough. The effective investor will want to provide as many investment options as is possible in order to realize the greatest return on his or her money. It is advised then to include cyclical and non-cyclical stocks in your stock portfolio.
When the market is in a downturn, it moves toward what is known as non-cyclical stocks and away from cyclical stock issuance. The prices of cyclical and non-cyclical stocks are relative to changes within the cycle of business. Cyclical stock movement is more dramatic as far as moving in accord with the cycle, while non-cyclical issues show very little movement with respect to the market’s cycle.
The concept behind non-cyclical and cyclical stock issues:
The concept behind cyclical and non-cyclical issues is very simplistic. When money is at a premium, the question arises: What is it I can do without? Another question is: What is it I absolutely require? In other words, you may wish to purchase a new automobile, but if your budget does not allow it, then, suffice it to say: you are going to wait to purchase it when money is not quite so tight. On the other hand, everyday items and services like household products and utility bills must be purchased or paid.
Cyclical stocks are those services and items that commercial enterprises and regular consumers buy when confidence in the economy is relatively high. Conversely, non-cyclical issues are those items and services which cannot be put off; no matter how poor the state of the economy. In our example above, utilities and household items would, therefore, represent non-cyclical stock issues. The automobile is an example of a cyclical-type stock.
In further explanation, Standard and Poor’s (the well-recognized United States financial services company) provides ten sectors of classification of stock. Two of these sectors are: a) consumer staples, and b) utilities. These two sectors are considered non-cyclical stocks. All of the other sectors are classified as cyclical stock issues. In summary: if the item is not a consumer staple or utility, then it is considered a cyclical stock.
In order to counteract a business cycle that continually changes: many economists will recommend you include within your financial portfolio a nice mix of non-cyclical; and cyclical stock issues. In this way, you are safely diversified; and your finances and investments are less likely to take a nose-dive when the economy is less responsive to the disposable income of the consumer.