What are cyclical and defensive stocks?

In Soviet Russia, chess was a religion. Such that it has produced some enduring names of the sport – Kasparov and Karpov, to name a few. The region had a characteristic style of play – the Soviet school of chess – that was popularised by the great Mikhail Botvinnik. He reigned supreme for over 30 years. However, in 1960, 23-year-old Mikhail Tal defeated him in a series of thrilling games which featured his notable sacrificial play. While conservatism would have favoured Botvinnik most of the time, the world sometimes throws a curveball at you. This unpredictability is even truer in the world of investing. During a bull run, most investors invest in sectors that are performing; thus, they pick up cyclical stocks randomly. However, you need defensive stocks that your portfolio can benefit from during market slumps. We’ll show you how to balance them in your portfolio. What are cyclical stocks? Cyclical stocks rise through economic booms and just as quickly fall during busts. Their revenues and profits rise and fall in tune with the broader economy. When the economy expands, consumers and businesses spend more, lifting the fortunes of these companies. Conversely, during economic slowdowns or recessions, these companies tend to feel the pinch first, often experiencing sharper declines. Some typical sectors and industries that fall under cyclical stocks include: Automobiles Real estate and construction Travel, tourism, and aviation Metals and commodities These industries rely heavily on discretionary spending and capital investments thus their performance is intricately tied to economic trends. Suggested read: Mutual funds, Autopilots and Air Crashes What are the characteristics of cyclical stocks? Understanding cyclical stocks’ behaviour can help investors avoid common pitfalls. Here are key characteristics: Highly sensitive to consumer and business spending: Their earnings often fluctuate widely with changes in demand. Strong earnings growth during economic booms: When times are good, cyclical stocks can outperform other stocks significantly. Sharp declines during recessions: These companies tend to suffer steep drops in earnings and stock prices during downturns. Higher volatility: Price swings can be more pronounced compared to the broader market. Price traps for momentum chasers: Cyclical stocks may appear cheap at the top of a cycle and expensive at the bottom, luring inve

This article was originally published on May 30, 2025.