What is the difference between cyclical and non-cyclical stocks?

The difference between a cyclical stock and a non-cyclical stock is that a cyclical stock is highly correlated with movements of the business cycle, while a non-cyclical stock has little to no movement that correlates with the business cycle.

Cyclical stocks comprise businesses that operate in industries with high consumer spending during economic expansion. Businesses such as auto manufacturers, home building and construction, and those that produce other luxury items such as boats are all examples of cyclical stocks.

During economic growth or upswings, these businesses capture most of the increases in spending as consumers are more willing to spend their additional earnings on luxury items. During economic recessions, consumers reduce their spending as they tighten their budgets. Instead of spending money on nonessential goods that make up businesses with cyclical stocks, consumers instead spend their money on essential goods.

Non-cyclical stocks, or defensive stocks, comprise businesses that operate in industries that do well during economic downturns. This is because these businesses have essential goods such as utilities. Luxury goods are nice to have, but consumers need utilities such as water, electricity and gas.

When confidence in the economy is low, and there is a potential for reduced salaries or jobs, consumers elect to spend what money they have on essential goods over nonessential goods. This increases the share price of non-cyclical stocks and reduces the share price of cyclical stocks.

Businesses with non-cyclical stocks have sticky demand, which means that demand for their product or service is always there, such as the demand for insulin. Businesses with cyclical stocks, on the other hand, have a demand for their products that isn't sticky and fluctuates based on the economic environment.