Non-Cyclical Stocks and Their Relationship to the Economy
Three pivotal economic events of
2019 were: (1) the prolonged trade dispute between the U.S. and China; (2) the
series of three interest rate cuts by the Federal Reserve; and (3) chatter
about a possible 2020 recession.
It remains to be seen whether a
recession is on the way, but if you’re concerned about market volatility,
schedule time to review your portfolio with one of our financial advisors to discuss
methods to potentially add more defense and security to your personalized
As far as more general means of
adopting a more defensive portfolio posture, consider these guidelines:1
- Seek out
companies that are efficient, meaning they have a relatively high and
consistent return on equity.
- Focus on
businesses you understand; the start of a new recession is no time to be
- Check out a
company’s historic average return on equity over at least a 10-year period.
- Consider a
company’s value. Certain stocks, categorized as “non-cyclical,” are largely
unaffected by drops in the stock market because they hold value even in times
of economic decline.
Companies that produce non-essential
products, also commonly known as consumer discretionary goods and services, are
a good example of cyclical stocks. Auto manufacturers are considered cyclical
because car sales tend to rise when consumers are gainfully employed and the
economy is growing.2
But no matter how far the economy
may decline, there’s never a complete standstill. People will always buy
necessities like toothpaste and toilet paper. The companies that make these
evergreen products are considered consumer staples and are an example of non-cyclical
stocks. Food and beverage, tobacco, household and personal product industries
all fall under this category.3 Another non-cyclical sector is
utilities. Utility companies are widely recognized for having a stable business
model and, as a result, tend to pay out higher dividends.4
Value stocks are back in vogue.
For years they have been eclipsed by growth stocks, but with market volatility possibly
on the horizon, it may be good for investors to consider securities the market
may have overlooked. Value stocks are those whose prices rather underestimate
the true health and potential of the company. They tend to be cheaper than their
competitors and may have a price-to-earnings ratio lower than the broader
After a decade of underperformance,
Bank of America market analysts say value stocks, as a category, have never
been this affordable. They point out that the last time their prices dropped
this low was back in 2003 and 2008. In both time periods, value stocks went on
to outperform momentum stocks by 22 and 69 percentage points, respectively,
over the following year.6
prepared by Kara Stefan Communications.
4 Joseph Belmonte. Virginia Pilot. Nov. 11, 2019. “How
to play defense with your investment portfolio.” https://www.pilotonline.com/inside-business/vp-ib-expert-belmonte-1118-20191111-4tdifjm5xjge3c4yl5o7yamgfm-story.html. Accessed Nov. 29, 2019.
3 Ken Little. The Balance. Oct. 29, 2019. “Understanding
Cyclical and Non-Cyclical Stocks.” https://www.thebalance.com/understanding-cyclical-and-non-cyclical-stocks-3141363. Accessed Nov. 29, 2019.
1 Sweta Jaiswal. Yahoo! Finance. Nov. 16, 2019. “Here’s
Why Consumer Staples ETFs Are Rising This Year.” https://finance.yahoo.com/news/heres-why-consumer-staples-etfs-194407670.html. Accessed Nov. 29, 2019.
2 Timothy Smith. Investopedia. Nov. 7, 2019. “Lights
Out: 3 Expensive Utilities Stocks With Chart Tops.” https://www.investopedia.com/lights-out-3-expensive-utilities-stocks-with-chart-tops-4775538. Accessed Nov. 22, 2019.
5 Nick Giorgi. Merrill Lynch. July 1, 2019. “What is a
value stock?” https://www.merrilledge.com/ask/investing/what-is-a-value-stock. Accessed Nov. 29, 2019.
6 Yun Li. CNBC. Nov. 8, 2019. “Value stocks have ‘never
been this cheap,’ Bank of America says.” https://www.cnbc.com/2019/11/08/value-stocks-have-never-been-this-cheap-bank-of-america-says.html. Accessed Nov. 29, 2019.
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