Defensive vs. cyclical
Another factor in stock performance is how
closely a company's business success is tied to the condition
of the economy.
Defensive stocks, in industries such as utilities, drugs, healthcare,
and food, are often more resilient in recessions and stock market
slides — at least theoretically — because product demand
continues. Many investors include them in their portfolios to
offset more volatile stock investments.
Cyclical stocks, on the other hand, may flourish in good times
and suffer when the economy dips. Airlines, for example, tend
to lose money when business and pleasure travel are cut back.
When the economy slows down, cyclical stock prices typically fall,
because company earnings are down as well. But when the economy
recovers, the cycle may work in your favor: Earnings will probably
rise and the stock price will go up.
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