What Are Cyclical Assets?
Cyclical assets are assets that have fluctuating performances. Moreover, cyclical assets tend to be those that fluctuate with the economy's regular business cycle. When an economy performs well, so do cyclical assets. The reverse is also true. The two main assets that tend to consistently perform along the business cycle is that of the stock market and the real estate market.
Other People Are Reading
-
Business Cycles
-
A business cycle is a periodic pattern exhibited in most capitalist economies. Specifically, business cycles encompass the upswings and downswings of various economic indicators. There are two main elements of business cycles. The first is called an economic expansion, which is characterized by the increase in performance of assets and business performance. The other is called a contraction, which characterizes an economy's decrease in performance. Business cycles are measured by gross domestic product, or GDP, growth. A positive GDP growth indicates that an economy is expanding, while a negative GDP indicates that the economy is contracting. Although periodic, business cycles are not regular or predictable. Ten years of expansion may be followed by three years of contraction, followed by two years of expansion, followed by five years of contraction, and so on.
Characteristics of Business Cycles
-
Macroeconomists regard business cycles as having a generally defined path. After a contraction, or a recession, the economy starts its expansion. Early expansions are often defined as economic recoveries. GDP increases and unemployment falls. Inflation may result during this process. Economic expansion continues up until a certain point, called a peak. The peak may be the point where the economy experiences an economic shock. After the peak, contraction sets in, while GDP falls and unemployment increases. Deflation, the opposite of inflation, may occur at this point. It should be noted that as businesses are affected by increases and decreases of people's spending power, their performance is tied in with an economy's business cycles.
-
Cyclical Assets: Stocks
-
An asset is considered cyclical if its performance is characterized by the business cycle. One obvious example of this is company stock. Companies make less profit during times of economic contraction as people are less able to purchase the company's goods and services. This decreases company profits and they are less likely to pay a dividend on their outstanding stock. A lack of dividend payments will impact the price of a stock negatively. Stock prices tend to fall during and economic contraction. During expansion, the reverse is true, as stock becomes more valuable when they pay more dividends. People are also more likely to purchase stock as they have a greater level of disposable income to invest. An increase in stock purchases increases their price.
Cyclical Assets: Real Estate
-
Another asset that is considered cyclical is that of real estate. Real estate may include residential properties. When people have less spending power, they are less likely to buy a home. Less buying depresses the price of an asset. House prices tend to go hand-in-hand with unemployment rates. Furthermore, during a recession, banks tend to lend less as they become cautious of the borrower's ability to pay. Less mortgages equate to less home purchases. The cyclical nature of real estate also extends to commercial real estate, such as offices. If businesses are making less money, they are less likely to expand and require more office space. Some companies even go bust and vacate their office premises. An increased level of supply entails falling prices.
-
