Cyclical vs. Defensive Businesses

Some businesses boom and bust with the economy; others sell things people buy in any weather. Here is how cyclical and defensive stocks differ, with real volatility numbers.

Two kinds of demand

Cyclical companies sell things people and businesses buy more of when times are good and put off when times are tight: cars, heavy equipment, travel, luxury goods, building materials. Their profits rise and fall sharply with the economy. Defensive companies sell necessities, such as food, drinks, household products, electricity and basic health care, so their sales hold up better in recessions.

Cyclical sectors swing with the economy; defensive sectors hold steadier.

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