GIPHY / istock / getty

What Are Consumer Cyclical Stocks?

Consumer cyclical stocks are those issued by companies in the consumer cyclical (consumer discretionary) sector. As companies that sell nonessentials, these stocks tend to soar in growing economies and sink during downturns.

Consumer cyclical stocks, explained

Consumer discretionary stocks, or consumer cyclical stocks, are issued by companies that sell nonessential goods to consumers rather than businesses. As a result, their profits (and stock prices) tend to “cycle” with economic conditions.  

You can find consumer cyclical stocks in industries like:

  • Retail
  • Tech
  • Furniture
  • Clothing
  • Travel and leisure
  • Automotive

You can contrast consumer cyclicals against non-cyclical consumer staple stocks, which include necessities like groceries, household goods and healthcare. 

Consumer cyclicals and the business cycle

The term “cyclical” indicates that the performance of these consumer stocks – and their underlying companies – are closely linked to the business cycle. 

In other words, when the economy performs well, these stocks tend to go up. When the economy shrinks, consumer cyclicals suffer. (Inversely, non-cyclical stocks often outperform the market during slow or backward economic growth.)

The reason is straightforward: when consumers have more money, they can splurge on nonessentials like new phones, cars and clothes. Consumer cyclicals can have higher profit margins, which means investors often like to have them in their portfolios. In particular, the sector often outperforms during the early stages of recovery following a recession. 

But when economies (and disposable incomes) decline, consumers limit or cut out nonessential spending. Stagnant or shrinking earnings cause investors to safeguard their funds elsewhere, and stock prices drop. 

For instance, consider the volatility consumer cyclicals experienced throughout the pandemic. 

During the initial market crash in 2020, consumer cyclicals plunged, while staples like groceries and healthcare soared. As the economy reopened, consumer cyclicals (particularly tech and work-from-home firms) picked up and their stocks skyrocketed. 

Then, when the hype deflated and inflation spiked, many consumer cyclicals dropped into the 2022 bear market.  

How do consumer cyclicals affect you?

Consumer discretionary stocks can be volatile, particularly as the economy transitions between segments of the business cycle. While consumer cyclical stocks provide ample room for growth, they also come with greater downside risk. 

On the other hand, consumer non-cyclical stocks tend to outperform during downturns due to their essential natures. However, they may underwhelm (albeit by remaining fairly steady) the rest of the time.

One of the best ways to see long-term profits from consumer stocks is balancing cyclical and non-cyclical investments. While consumer cyclical stocks provide some excitement, the non-cyclicals will keep you diversified and balanced cycle-round. 

What this means for you

On the whole, cyclical stocks tend to see greater ups and downs than defensive or fixed-income positions. That said, a little volatility is required if you want to enhance your gains. Since consumer cyclicals tend to fluctuate with the economy, they may be a good pick to boost your long-term growth. 

If you want to invest in consumer cyclical stocks with Q.ai, we don’t offer a dedicated Kit – yet. Instead, you can pick from a variety of other Kits that may contain discretionary picks, like Emerging Tech, Forbes, U.S. Outperformance, Large Cap and more. 

Disclosures

Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.

Hands-free approach to investing

Our AI manages your money with commission-free, institutional-grade, AI-powered investment kits.