Cyclical vs Defensive Stocks in Recovery Phase

Hard Economic Analysis Business Cycle Analysis

During a recent economic analysis, an investment manager is assessing the implications of the current business cycle phase on a diversified portfolio. The economy is showing signs of recovery after a recession, characterized by rising GDP, lower unemployment rates, and increasing consumer confidence.

Given this context, the manager is considering the potential impacts on various sectors of the economy, such as cyclical versus defensive stocks, and how each sector typically responds during the recovery phase of the business cycle.

Which of the following statements best describes the expected performance of cyclical stocks relative to defensive stocks during the recovery phase of the business cycle?

Cyclical stocks are expected to underperform defensive stocks as consumers remain cautious about spending.

Cyclical stocks are typically expected to outperform defensive stocks as economic activity picks up and consumer spending increases.

Cyclical and defensive stocks are expected to perform equally as the economy transitions from recession to recovery.

Hint

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