Cyclical stocks are essentially equities that see price fluctuations based on economic cycles (also known as business cycles). During periods of economic growth and rising inflation, cyclical stock prices tend to increase, while during periods of economic slowdown and recessions, they tend to fall.
Strong economies mean that consumers have more disposable income, which helps to increase consumer demand. This drives corporate profits and increases the dividends paid to shareholders. During recessions, consumer demand falls as individuals have less disposable income, reducing corporate profits and, therefore, share prices. This often leads to a stock market crash.
Low interest rates may benefit most (non-financial) cyclical stocks, as cheaper borrowing stimulates economic activity and investment. Conversely, high interest rates reduce consumers’ disposable income, which hits business profits and makes it more expensive for these businesses to borrow money, which may lead to a slowdown in expansion plans. This usually results in a decrease in earnings, with a negative impact on stock prices.
However, falling interest rates are associated with recessions. Central banks generally cut interest rates during slow periods of business cycles in order to stimulate economic activity. Low interest rates can be bad for banking stocks, as they cut into profit margins.
All of the above are general points. Each recession and expansion is different from the last and affects different cyclical stocks in a number of ways.