Which type of stock is characterized by its tendency to rise and fall in correlation with the economy?

Cyclical stocks are closely tied to the economic cycle, meaning their performance is directly influenced by the overall state of the economy. During periods of economic growth, these stocks typically see price increases as companies in sectors such as automotive, construction, and travel experience higher demand. Conversely, when the economy is in a downturn or recession, these stocks usually decline in value because consumer spending decreases, affecting the companies’ revenues and profits.

In contrast, defensive stocks tend to remain stable or perform better during economic downturns, as they represent companies that provide essential goods and services, such as utilities or consumer staples. Value stocks are those that are considered undervalued relative to their fundamentals, and their price movements can vary independently of economic cycles. Income stocks, often characterized by high dividend payouts, may not fluctuate as much with the economy because their stability often attracts investors seeking regular income regardless of economic conditions.

Thus, the nature of cyclical stocks makes them uniquely sensitive to the economic landscape, making them the correct answer for the described characteristics in the question.