When you first begin learning to invest and paying attention to investing-related content and media coverage, two terms you’ll you will begin to hear about are “cyclical” and “secular.”

These two terms describe a theoretical dichotomy in economic trends and in types of investments.

The TLDR version of this:

The Business Cycle and Cyclicals

The business cycle refers to the natural ebb and flow of economic activity over time. It consists of four key phases: expansion, peak, contraction, and trough.

During an expansion, economic growth accelerates, often marked by rising GDP, increasing employment, and higher consumer spending. This growth typically leads to a peak, where the economy reaches its highest level of activity before growth slows or reverses.

A large increase in average stock prices, a “bull market,” is often accompanies an economic expansion, and euphoria in the market may be a leading indicator of an economic peak.

The contraction phase follows, characterized by declining economic activity, rising unemployment, and reduced spending, often culminating in a trough, which marks the lowest point of the cycle before the economy begins to recover. When the bottom of such a trough results in two consecutive quarters of negative gross domestic product (GDP), it is referred to as a “recession.” Declines in stock market value, a “bear market,” often accompany economic contraction.

The business cycle typically unfolds over varying time periods, depending on the unique economic conditions and external influences affecting a particular cycle. Historically, business cycles in developed economies like the United States have ranged from 2 to 10 years, though this duration can be shorter or longer in specific cases.

As I mentioned avoce, “Cyclical” can also refer to investments, businesses, or sectors that tend to perform in sync with these phases of the business cycle.

For example, industries like consumer discretionary (e.g., retailers, restaurants), automotive, and travel typically thrive during expansions when consumer confidence and spending are high. However, they may struggle during contractions as people tighten their budgets.

Investors often track indicators like unemployment rates, consumer sentiment, and central bank policies to predict where the economy might be in the business cycle.

This helps them assess the potential performance of cyclical investments. For instance, during a contraction or early in a trough, cyclical stocks may underperform, but as the economy begins to recover, these investments can offer significant upside as demand rebounds.

Understanding the business cycle can help investors identify opportunities to capitalize on these fluctuations, timing their exposure to cyclicals when conditions are most favorable and reducing it during downturns.

However, predicting the precise timing of these phases is notoriously difficult, adding an element of risk to cyclical investing.

It is also important that just because two stocks are considered cyclicals, they may not behave the same during economic cycles. Take for instance the stock price charts of Ford and Toyota below.

As you can see, Toyota’s stock price steadly climbed over the decades as Ford’s stagnated.

This might suggest that while Toyota is exposed to economic cycles, it may have taken advantage of long-term secular trends (see the next section), such as technological innovation or changes in the global supply chain to outperform its rivals over time.

It is true then, that even though an investment may be considered a cyclical, it can also be impacted by secular trends that impact its sector.

Secular Trends and Investments

Secular trends are long-term, structural shifts in the economy that persist across multiple business cycles.

Unlike cyclical trends, which are tied to the periodic rise and fall of economic activity, secular trends are driven by transformative forces such as technological innovation, demographic changes, globalization, and government policies. These trends can span decades, shaping the trajectory of industries and markets over the long haul.

Investments aligned with secular trends are often referred to as “secular investments” because they are less sensitive to short-term fluctuations in the business cycle.

Some broad examples of secular businesses are those that cater to an area of expanding consumer demand (eg, healthcare) or tech companies.

Examples of factors that drive secular trends:

• Technological advancements: The rise of the internet, smartphones, and artificial intelligence has created enduring growth opportunities in sectors like software, cloud computing, and semiconductors.
• Demographic shifts: Aging populations in developed nations have driven long-term demand for healthcare, senior living, and retirement planning services, while growing middle classes in emerging markets have spurred consumer goods and travel.
• Environmental sustainability: The global push for renewable energy, electric vehicles, and sustainable practices has created long-lasting opportunities in green technologies and industries.

These and other such phenomena are often refered to as “secular tailwinds,” long-term, structural factors or trends that drives sustained growth and creates favorable conditions for a business, industry, or economy over an extended period.

Unlike short-term catalysts or cyclical booms, secular tailwinds are rooted in enduring shifts that persist regardless of temporary economic fluctuations.

Secular investments often appeal to long-term investors looking to capitalize on these powerful forces. For instance, while individual companies or sectors may experience volatility during business cycle downturns, those tied to secular trends often demonstrate resilience and consistent growth potential.

That said, investing in secular trends is not without risk. Transformative shifts often attract intense competition, which can erode profits, and long-term adoption of new technologies or practices may take longer than expected. Moreover, unexpected regulatory changes or shifts in consumer behavior can alter the trajectory of a trend.

The boom-and-bust technology cycles are a good example. In the late 1990s, the rise of the internet drove intense speculation in online businesses, resulting in the so-called “dot com” bubble. When that bubble burst in 2000. Many investors lost their shirts on companies, such as WorldCom and AOL, and by the end of 2000, most internet companies stock prices has droped 75% from their highs, wiping out $1.755 trillion in value.

The internet has inarguably been a massive secular trend that has upended many business sectors, but the bubbles that form around new secular trends, particularly in the technology sector, can be highly risky times — the emergence of artificial intelligence technologies in recent time and extremely high valueations of AI-related companies has many in the investment community warning of another such bubble.

While much less sexy, another business sector that is considered secular is consumer staples, companies that produce essential goods people use daily, such as food, beverages, household products, and personal care items.

These companies are considered secular investments because demand for their products remains steady regardless of economic conditions. Examples include Nestlé, world’s largest food company, and Proctor and Gamble, Known for its diverse range of household and personal care products like Tide detergent, Pampers diapers, and Gillette razors.

People continue to buy necessities like toothpaste, cleaning supplies, and groceries even during economic downturns, providing stability and resilience to these businesses.

While secular investments are more insulated from economic cycles, they may still be impact as the economy expands and contracts. It’s more a matter of degree of the impact of these cycles that defines an investment as secular or cyclical. For example, during a steep market decline, all stock prices are likely to drop, whether they are cyclical or secular.

Examples of Cyclical and Secular Investments

While stocks are often the first asset class discussed in cyclical vs. secular terms, other investments such as real estate, commodities, bonds, and alternative assets can also fit into these categories.

Cyclical Investments

Cyclical investments are influenced by the ups and downs of the business cycle and perform well during periods of economic growth but may struggle during downturns.

Real Estate

• Commercial Real Estate (e.g., Office Buildings, Retail Spaces): Tends to perform well during economic expansions when businesses grow and consumer spending increases.
• Real Estate Investment Trusts (REITs): Some REITs, particularly those focused on hotels, resorts, or malls, are highly sensitive to economic cycles.

Commodities

• Energy (e.g., Oil, Natural Gas): Prices are often tied to economic activity, rising during expansions as demand increases.
• Industrial Metals (e.g., Copper, Aluminum): Heavily reliant on construction and manufacturing demand, which fluctuates with the economy.

Fixed Income

• High-Yield Bonds (Junk Bonds): Tend to perform better during economic growth, as companies with lower credit ratings are less likely to default when the economy is strong.

Private Equity and Venture Capital

• Investments in startups or growth-stage companies are often cyclical, performing well in economic booms when funding and valuations are high but struggling during downturns.

Secular Investments

Secular investments align with long-term trends and are less affected by short-term economic fluctuations.

Real Estate

• Residential Real Estate: Housing markets in areas with growing populations (e.g., urban centers or regions experiencing demographic shifts) often benefit from secular trends in urbanization or migration.
• Green Building Projects: Properties built or retrofitted to meet sustainability standards align with the secular trend toward environmental responsibility.

Commodities

• Precious Metals (e.g., Gold, Silver): Often considered secular investments because they serve as a hedge against long-term inflation and currency instability.
• Renewable Energy Commodities (e.g., Lithium for EV Batteries): Driven by the secular shift toward electrification and green energy.

Fixed Income

• Inflation-Protected Bonds (e.g., TIPS): Benefit from the long-term secular trend of rising inflation over decades.
• Green Bonds: Issued to fund environmental and sustainability projects, aligned with the global push toward addressing climate change.

Private Equity and Venture Capital

• Funds targeting industries like clean energy, healthcare innovation, or artificial intelligence align with secular trends, providing long-term growth potential.

Alternative Investments

• Infrastructure Projects: Investments in essential infrastructure (e.g., renewable energy grids, water utilities) often benefit from government policies and long-term urbanization trends.
• Farmland: Driven by the increasing global demand for food and sustainable agriculture practices.

Conclusion

Understanding the difference between cyclical and secular investments is crucial for any investor looking to navigate the complexities of financial markets. Cyclical investments, tied closely to the rise and fall of the business cycle, can offer significant opportunities during periods of economic growth but also come with heightened risks during downturns. In contrast, secular investments align with long-term, structural trends that often transcend economic fluctuations, providing potential for consistent growth over time.

Some investors focus on timing these cycles to maximize returns, leveraging the ebb and flow of economic activity to guide their strategies. However, others, such as legendary value investors like Warren Buffett, take a different approach.

They emphasize business fundamentals—seeking companies with strong balance sheets, competitive advantages, and solid management—rather than trying to predict cyclical or secular dynamics, which they argue are inherently unpredictable.

Both approaches have merit, and the choice between them often depends on an investor’s time horizon, risk tolerance, and confidence in their ability to read economic or market trends. Regardless of strategy, being aware of these dynamics and incorporating them into your broader investment understanding can help you make more informed decisions and build a portfolio aligned with your financial goals.