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Is the Firm’s Demand Discretionary?

Some companies sell products or services which have stable demand irrespective of the broader economic situation. However, other companies sell discretionary products whose demand falls when the going gets tough. Based on this fact, stocks can be classified into cyclical or defensive stocks.

Hotel chains, airlines, and luxury clothing manufacturers are examples of companies that witness a drop in revenues during recessions; these are cyclical stocks. Power companies and consumer staples manufacturers are examples of firms with stable earnings; these are defensive stocks.

Therefore, investors often ditch cyclical stocks in recessions as their prices are volatile and simultaneously add defensive stocks to the portfolio. Cyclical stocks make a comeback as the economy improves. Which ones are in your portfolio?

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