You probably know that maintaining a diverse, balanced portfolio is key to achieving your financial goals. But slow and steady doesn’t always win the race: typically, some volatility is required to chase those higher returns. For many investors, consumer cyclical stocks can provide the extra “oomph” needed to seek long-term wealth.
Consumer cyclical stocks are issued by companies in the consumer cyclical (consumer discretionary) sector. These businesses generally sell nonessential goods or services like vehicles, luxury goods and furniture.
As consumer cyclical stocks, the underlying companies sell nonessential goods and services to consumers, rather than businesses. As a result, their profits (and stock prices) tend to “cycle” with economic conditions. You can find consumer cyclicals in industries like:
By contrast, non-cyclical consumer staple stocks sell essential goods and services like groceries, household items and healthcare.
Consumer cyclical companies – and their stock prices – are closely linked to the business cycle.
When the economy performs well, these businesses take in more money, and their stocks tend to rise. When the economy shrinks, business profits may drop, and consumer cyclicals suffer. (Conversely, 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 cars, clothes and furniture. In turn, consumer cyclicals see larger profits, which attracts investors. And as long as this economic growth lasts, investment activity and stock price growth typically remain strong.
But when consumers’ wallets shrink, they tighten their belts and limit their budgets to essential purchases. As a result, businesses' earnings may stagnate or shrink, and stock prices may flounder as investors turn to better-performing assets. If the downturn grows severe enough, smaller or struggling consumer cyclicals may go bankrupt.
Consumer cyclical stock performance is inextricably linked to consumer spending habits, which in turn are influenced by economic factors like:
These factors impact consumers’ confidence about the economy. Consumer confidence – as measured by the Consumer Confidence Index, or CCI – describes the everyday person’s attitude toward spending and economic prospects.
Historically, consumer confidence remains strong when the economy is strong and discretionary incomes are high. But when the economy or discretionary incomes falter, consumers grow less confident in their financial security. As a result, nonessential spending often drops – and takes cyclical stock prices with it.
Take Covid-19, for instance.
Pre-pandemic, the Consumer Confidence Index routinely topped 120 as spending remained relatively elevated. But in April 2020, the CCI plunged to its lowest level in six years as the stock market tanked. Though confidence rose again the following year, by late 2022, it waned with the rising specter of economic recession.
Consumer cyclical stocks often see their best growth during the early stages of recovery following a recession. For example, consider the volatility that consumer cyclicals experienced during the pandemic.
During the initial market crash in 2020, the sector plunged, while staples like groceries and healthcare soared. As the economy reopened, consumer cyclicals (particularly those in the work-from-home space) picked up, and their stocks skyrocketed.
Then, when the hype deflated and inflation spiked, many consumer cyclicals dropped into the 2022 bear market.
Tesla is a particularly notable example of a consumer cyclical that rode the pandemic price coaster.
At the start of 2020, Tesla stock was worth around $30.
By January 2021, it was worth nearly $300. Despite some downward volatility mid-year, the infamous carmaker topped $400 by November.
And then 2022 hit, and by January 2023, the stock sunk below $115 – a loss of over 70% from its November 2021 high.
It’s easy to see how a cyclical stock like Tesla could outperform in good times and underperform in bad ones.
When people have higher discretionary incomes, they may be more inclined to purchase a luxury vehicle like a Tesla. But when discretionary budgets dry up, they may be wary of purchasing any vehicle, let alone a high-priced luxury ride. Instead, consumers may walk, take the bus or buy a used car they can afford out of pocket.
Tesla is far from the only consumer cyclical out there. Many other household names from a variety of industries make the list, including:
You’ll notice that some of these stocks also fit other sector profiles (Amazon as a tech stock, for example). Between widespread technological adoption and growing corporate portfolios, it’s increasingly common for companies to fit multiple sectors simultaneously.
Consumer discretionary stock performance can be volatile, particularly as the economy transitions through the business cycle. And though they provide ample room for growth in expanding economies, they experience greater downside risk in receding ones.
By contrast, consumer staples stocks tend to outperform during downturn due to selling essential goods and services. However, they may underwhelm (though remain fairly steady) in prosperous times.
One of the best ways to profit from consumer cyclicals is to incorporate them into a diversified portfolio. Consumer cyclicals will provide some excitement and extra “oomph” when the good times come. Meanwhile, the non-cyclicals will keep you diversified and balanced no matter the stage of the business cycle.
It’s also wise to add some dividend-paying assets to your strategy to keep that passive income rolling in year-round.
Consumer cyclical stocks often face greater volatility than non-cyclical stocks or fixed-income assets. However, volatility is a necessary component of any portfolio – after all, volatile doesn’t have to mean down.
For investors looking to trade consumer cyclicals with Q.ai, we don’t offer a dedicated Kit for that – yet. Instead, we offer a variety of other Kits that may contain discretionary picks, like Emerging Tech, Forbes, Active Indexer and more.
With an AI-backed investment strategy, you can leverage consumer cyclicals to boost long-term growth as part of your diversified portfolio.
Examples of common consumer cyclical stocks include:
Yes, consumer discretionary stocks are considered cyclical because their profits (and stock prices) fluctuate with economic activity.
When the economy grows and consumers have more income, consumer cyclical stocks perform well. But when the economy shrinks and disposable income dries up, consumer cyclicals often flounder.
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