Imagine you're standing at a Craps table in Las Vegas. There's a guy there who has a big cowboy hat on, and he's been throwing the bones for a good 20 minutes. Every time he throws the dice, he's hitting 7 or 11. The crowd is going wild, and you're betting alongside him. Every time he wins, you win. Your wins correlate with his wins. You’re probably going to get comped alongside him if he keeps it up.
But suddenly...he hits a cold streak. And as he begins to lose, you also lose. That’s the basis of a category of stocks called consumer cyclicals.
In the scenario above, the man in the cowboy hat is the U.S. economy, and you’re a sector like automobiles, housing, retail, and media. This class of stocks requires strong U.S. economic fundamentals and growth to perform. During periods of economic expansion, we see consumers pour disposable income into consumable products. This category includes durable goods like cars and refrigerators, and non-durable products like whiskey, ketchup, and decorative soap.
Come to think of it: whiskey does well in any economy.
Related or Semi-related Video
Finance: What are Cyclical and Countercy...4 Views
Finance a la shmoop, what are cyclical and counter cyclical stocks? Okay so,
there's this thing called the business cycle and the stock market generally [The stock market going around the business cycle]
follows it. About every seven or eight years or so in the modern era the
business cycle booms and then for a year or two it busts, why? Well nobody really [The peaks are troughs of the cycle are shown]
knows but presidential cycles seem to have a lot to do with it when the
economy is bad the people vote with worry and elect politicians focused on [Guy smiling on stage]
you know helping them pay their mortgages. When the economy is good the
people tend to vote with guilt and they elect politicians who help them feel [The other politician now smiling on the stage]
less bad about doing well, something like that but when the cycle is good trending
up the future's so bright you have to wear shades kind of thing. [Girl putting on shades because of the bright light coming from a door labelled 'the future']
Well people then upgrade their washer dryers, they buy new cars rather than fix [Clothes going round in a washing machine]
their old ones, they travel far and wide on vacation, they treat themselves to a [Two deckchairs on a beach]
second maybe even a third scoop of ice cream. So a cyclical stock would be one
that sells any and or all of the above. That company will do very well when
things are going well, so shockingly a counter cyclical stock is from well the
opposite. Think drugs like legal ones like you'd have to be pretty poor to not [Tablet capsules falling and pills bouncing out]
buy that bottle of Viagra or aspirin when you have a you know headache... and
insurance are you really gonna cancel your policy in bad times, [Guy looking shocked]
maybe but boy it'd be one of the last things on your list.
Well how about cable TV and internet connectivity yeah most people would [Someone using a computer]
starve first. There's a basic cycle in business, it happens roughly every two
presidential elections so yeah don't fight the cycle not unless you're into [Guy getting ready to box against the business cycle]
some very weird type of martial arts...
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