Cyclical vs. Defensive Stocks

Industries that greatly differ from each other in terms of business activity can react similarly to changes in the economy. For example, cyclical stocks, like retail and travel, are sensitive to the economic cycle because in tight economic periods, consumers are less likely to spend money on non-essential items.

On the other hand, defensive stocks represent necessary items, like food, gas and medicine, and tend to change very little with the economic cycle because consumers are likely to continue buying them even in tough economic times.

Investing in both cyclical and defensive stocks can potentially help hedge against the risk you face by selecting only industries that react similarly to changing market conditions.