Cyclical

Cyclical businesses and investments are those that are sensitive to the broader economy. Those that are not cyclical are either defensive or counter-cyclical.

The profits of a cyclical business would normally be expected to be much higher during economic booms than during recessions. The share prices of cyclicals are heavily influenced by the outlook for the economy. Cyclical business include most media companies (especially those that depend on advertising revenues), most leisure business, and most non-food retailers.

Investors will choose to buy into cyclical businesses if they believe that the economy will do better than the market expects.

Some sectors may follow cycles that lead or lag general economic growth. An important example of this is that consumer and business demand are rarely perfectly synchronised, so it is possible to have recovery in one while the other is in cyclical decline.

Businesses that are sensitive to interest rates are also regarded as cyclical. This is because changes in interest rates are closely linked to the performance of the economy as a whole.

Some industries follow cycles of their own that may or may not depend on the economy as a whole. A good example of this are sales of games consoles (and video games to play on them) which follow a technological cycle driven by the introduction of new generations of consoles.

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