Cyclical Stocks

The performance of cyclical stocks is highly dependent on economic development. When the economy is doing well, these companies also earn well. Share prices rise sharply, often disproportionately to the overall market. Price premiums of 60% compared to defensive stocks are no exception.

When the economy cools down, or even when there is a recession, the crisis has a disproportionate effect on earnings and stock prices often fall much more drastically than the market as a whole.

The price of cyclical stocks generally move sideways over long periods of time. An example is Daimler AG that is shown in the chart below.

Cyclical companies can often be found in the following sectors: automobiles, homebuilding, engineering, steel, wood, chemicals and many other sectors. During a crisis, the stock price decline of cyclical companies like Weyerhaeuser Company and Daimler is comparable with or stronger than an average stock index such as the Russel 2000 index.