Tech stocks have been wobbling all over the place for the last couple of days. The dominant narrative around this has been that the investors are pulling away from the tech stocks and moving into cyclical stocks. But what are cyclical stocks anyways? And why are investors pushing their way into them?
Cyclical Stocks 🔁
Cyclical stocks are tied to the economic cycle. They are highly correlated with how the overall economy is performing. When the pandemic hit in early 2020, some industries such as tourism, hotels took an expected downturn in their revenues. As such, the market responded by moving their funds from cyclical stocks to tech stocks. Stonks. This is why the tech stocks bounced even higher than expected.
Put another way, when the economy is doing well and the general population has a considerable disposable income to spend, the cyclical stocks tend to benefit.
Examples of cyclical industries: Tourism, hotels, restaurants, retail.
Defensive Stocks 🛡️
Defensive stocks aka non-cyclical stocks are the exact opposite of a cyclical stock. These stocks are expected to out-perform the economy during its downturn. These stocks belong to the industries that stay relatively stable regardless of how the economy is performing. For example, the utility companies. Everyone needs power in their homes/offices and water in their taps no matter how good or bad the economy is performing.
Examples of non-cyclical industries: Grocery chains, Utility companies, real estate.
Tech stocks are now defensive? 🤯
Over the past year the major tech stocks (Apple, Amazon, etc) have entered the defensive category as far as investors are concerned. They have moved to the “essential” end of the spectrum.
Put another way, during 2020, tech companies started becoming a rather essential industry. Of course, there is no hard and fast rule that can be used to categorize a stock into either category. But the overall market trend does point to the conclusion above.
Key Takeaways ✅
- Cyclical stocks tend to perform better when the economy is doing well or improving
- Vaccines are likely to kickstart the economy. The prospect of reopening the economy has gone from dream to reality very quickly.
- Investors are selling tech stocks (while they’re high) and pumping that money into cyclical stocks that will benefit from a post-COVID boom.