Question

Compare and contrast cyclical industries with defensive industries.

Answer 1

Cyclical Industry is a field that is vulnerable to the economic cycle. Business sales are typically high during economic growth and expansion. Some examples of the cyclical industries include, among others, cement, steel, manufacturing, capital goods. Therefore, it is clear from the above examples that these sectors are related to economic growth or that they continue to see an indirect income arising from economic growth changes.

Cyclical industries are influenced by the overall performance of the economy, calculated by the GDP which is an economic production metric. Levels of consumer spending-This is a big factor in shaping the cyclical industry and its stocks. When the index is high, then consumer spending on goods and services is expected to increase. Therefore, cyclical business stocks are surging.

Defensive sectors include firms that are relatively stable or relative resistant to economic volatility, i.e. economic expansions and recessions. In the event of an economic boom or contraction, protective firms remain largely stable in the sense that their profits are uninfluenced by the economic fluctuations. The industry typically consists of companies in the market dealing in necessity products, i.e., necessities.

Since defensive industries include companies typically dealing with necessities or vital commodities, they are fairly resilient to periods of economic boom or recession. Because of this reality, the worst economic downturns will survive by the defensive industries. Defensive industries consist of companies usually dealing with products of need. This is because a customer finds necessity products to be necessary. Consequently their demand elasticity is fairly inelastic. This means that, regardless of changes in wages, prices of related products, etc., customers would purchase the products of necessity.