Cyclical industry
A cyclical sector is an economic sector whose earnings situation fluctuates significantly over the course of the business cycle . Experience of the cyclical fluctuations in income and thus also in stock market prices is necessary for the fundamental analysis of stocks .
A number of industries are relatively independent of economic fluctuations. These include utilities and the healthcare industry , among others . The share prices of these companies will typically only show disproportionate price gains in the upswing and boom and, in return, cause fewer losses than cyclical stocks in the downswing. From the point of view of equity investors, the sectors concerned are also referred to as “defensive sectors”.
Sectors that are subject to strong cyclical fluctuations are mainly industrial companies and raw material producers . The trade is split. While some areas of trade, such as luxury goods, are considered to be relatively independent of the economic cycle, wholesaling in particular is cyclical. The banking business is also partly cyclical. While business with private customers here is more independent of the economic cycle, corporate customer business and, above all, investment banking fluctuates very strongly. The reasons for this are, on the one hand, increased risk costs due to company bankruptcies and, on the other hand, the low turnover in securities during downturns.
Whether an industry is cyclical can be determined historically by means of correlation analyzes between the change in GDP and industry profits or prices. A high correlation proves the cyclical behavior of the industry in the past. However, the behavior of industries can also change. While the telecommunications companies were typical utilities until the late 1980s and hardly exhibited any cyclical behavior, the character of the industry changed to a highly cyclical one in the 1990s.