Let's look at how sectors behave differently depending on the stage of the economic cycle.

The distinction between cyclical and defensive sectors.

A cyclical stock is one whose performance is closely tied to economic activity.

When the economy slows down or enters a recession, the company's profits and therefore its share price tend to fall.

But when the economy recovers and growth accelerates, profits rebound and the share price usually rises with them.

A classic example is the automobile sector.

When people's incomes fall, they delay big purchases like new cars, which drags down revenues and profits for automakers.

But when consumer confidence and employment improve demand returns, and these stocks tend to outperform that same pattern applies to other cyclical sectors, such as consumer discretionary, financials, industrials, and materials.

By contrast, defensive sectors also called non-cyclical show much more stable earnings through all phases of the economic cycle, their products are essential and purchased regardless of economic conditions.

Think of soap, toothpaste, or electricity.

Even in a downturn, people still need them.

This makes sectors like consumer staples, utilities, and healthcare more resilient when the economy slows or markets turn volatile between those two extremes sit a middle ground, often called sensitive sectors.

Sectors falling into this category include energy, technology, industrials, and communication services, which tend to move with the economy, but not as sharply as pure cyclical sectors.

Their betas, meaning their sensitivity to overall market movements are often close to one on the charts.

We can see this difference in action.

The green line shows the performance of the S-P-D-R-S and P US consumer discretionary ETFA proxy for cyclical stocks.

The blue line represents the S-B-D-R-S and P US utilities, ETFA defensive benchmark.

Notice how the consumer discretionary sector rises much more sharply during strong growth phases, for example, around 2020 and 2021, but also drops faster during slowdowns, such as the COVID-19 shock in early 2020.

Utilities, on the other hand, show steadier And smoother performance with smaller drawdowns and lower volatility overall.

This contrast illustrates why professional investors pay attention to sector classification when positioning portfolios through the business cycle.

Cyclical sectors offer greater upside during expansions, but carry more risk in downturns.

Defensive sectors provide stability and income when markets become uncertain, and a well balanced portfolio typically holds a mix of both adjusting the weights depending on the stage of the economic cycle.