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Industry and Economic Cycles
By Tim McIntosh MBA CFP® MPH http://www.SIPLLC.com
The distinction between cyclical stocks and defensive stocks lies in how closely related the stock’s performance is to industry and economic cycles.
Cyclical Stocks
Stocks that operate in industries that are highly correlated to the strength of the domestic economy are considered to be cyclical stocks.
For example, the construction and automobile industries are generally considered cyclical industries given that demand for their products is highly related to the current economic environment. In periods of weak or declining economic growth, demand for automobiles and new construction products decline, thus resulting in a decline in earnings for companies operating within those industries.
Defensive Sticks
Defensive stocks are viewed as being less susceptible to fluctuations in the overall economy.
For example, since demand for food products is generally considered to be less dependent on the strength or weakness of the overall economy, food stocks are generally considered defensive stocks.
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Conclusion
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Filed under: Investing, Portfolio Management | Tagged: cyclical stocks, defensive stocks |
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Crumbling Case For Stocks?
There seems to be a strong long-term case for stocks (global money creation/economic growth, etc.). But short/intermediate-term, it seems we may be in for a rough ride. Perhaps even a proper bear market with a decline of 20% (or more). Here are three reasons why:
1. Commodities prices and potential economic weakness
Although some of the weakness in commodities is likely related to strength in both supply and the dollar, it seems quite possible that some of the weakness is due to commodities markets discounting an impending weakening in the global economy (particularly commodities-hungry China). This argument is supported on an intermarket basis by this year’s rally in bonds (and associated lower rates that may have fallen on discounted expectations for growth). And while one might normally expect the stock market to discount future changes in economic conditions (as it is known to do), it seems the historic momentum (of a historic bull market) and the recent lack of volatility (and recent lack of a substantial correction) may be causing unjustified investor complacency (and perhaps kept the market from properly discounting potential economic weakness). A weaker economy could mean weaker stocks
2. Deteriorating market internals
Though the indexing trend seems to be reducing the relevance of stock market internals/technical indicators, such measures still seem quite relevant. And the recent thinning of market leadership and negative small-cap/large cap divergence seem ominous
3. Positive momentum in alternative investments (bonds)
Though they are of increasingly dubious valuation, bonds have had a strong year. And there has seemed to be a post-Financial Crisis tendency towards intense trends (that intensify with time). I call this the “pile in” phenomenon. I think it may be born of greatly heightened post-Financial Crisis investor anxiety (and downright nervousness). Such anxiety may be causing investors to follow the herd more as they seek mental/psychological comfort in their investment positions (which, of course, tends to be bad practice). This year’s bond rally may continue/accelerate due to this phenomenon. And should this materialize, the rally may get a further boost from late-year fund window-dressing. All of this may make bonds a more attractive alternative to stocks…at least for a while.
http://unlovedmoney.com/2014/09/27/crumbling-case-for-stocks/
David Twyford
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