Which stocks tend to perform well during an economic recovery but poorly during downturns?

Cyclical stocks are characterized by their performance correlating closely with the economic cycle. During periods of economic recovery, these stocks typically perform well due to increased consumer spending and business investment, as they are often tied to industries such as automotive, travel, and construction. When the economy is thriving, consumers are more willing to spend on non-essential goods and services, leading to heightened demand for products made by companies represented in this category.

Conversely, during economic downturns, cyclical stocks usually suffer as consumers and businesses cut back on spending. Companies in these sectors often see reduced revenues, which can impact stock prices negatively. Thus, investors tend to be more cautious about holding these stocks when economic indicators signal a recession.

The other types of stocks mentioned do not exhibit the same pronounced cyclical behavior. Defensive stocks, for example, provide more stability and tend to perform consistently through various market conditions, prioritizing essential consumer goods. Small-cap stocks can be highly variable, but they generally do not follow the same cyclical patterns as larger companies. Index funds are designed to replicate the performance of a market index and, while they may include both cyclical and defensive stocks, they do not specifically focus on the cyclical nature that this question targets.