I agree that it is frustrating when we are unable to pin people down as to what they mean by the things they say. It is a phenomenon in most areas of life, but particularly annoying in the financial world, where it is not only rife, but real money is involved. One of the things I keep hammering away at in technical analysis is the lack or intellectual rigour on much of the material. It is a long slow process, but in time we will improve things. So, I will not be running for cover, or trying to dodge your questions:
I am sure someone has laid down a definition somewhere that is specific to financial markets. However, in general terms, these words mean what they generally mean in the dictionary. The difficulty is not so much what they mean as how you apply them when it comes to specific situations.
Defensive: In the dictionary, this word has general connotations of offering resistance against attack. This seems a quite useful way to see it in the financial world. A defensive stock or a defensive portfolio would be one that might be expected to hold its value in adverse market conditions.
Now, looking at it this way immediately introduces a problem because there is a further layer of confusion between the price of a stock and its intrinsic value. Fundamental analysts, who subscribe to the efficient market hypothesis, may argue that there is no difference, but increasing evidence continues to be cited by critics to suggest that prices can get out of line with value. It may then well be the case that a defensive stock which holds its "value" in tough times, may nevertheless see its "price" fall. This poses the question of what we see to be the measure of defensiveness - value or price? Most people do not make this distinction between value and price, making the mistake of thinking that a business that holds up well in bad times will hold its price accordingly.
There is, of course a loose connection between earnings of a business and the price of its shares. This is very arguable and does not hold in extreme cases such as we see in wild bull markets or bear market panics. However, what most people think of as a defensive stock is one whose earnings hold up in difficult times and is not overvalued by the market, with the presumption that the price of its shares will fare better than less defensive stocks. In trying to identify which stocks are defensive, we need to look at these two aspects: The relative valuation of the stock price and the nature of the business with regard to the volatility of its earnings stream.
Relative valuation can be measured in lots of ways. The most accessible for most people is to look for a low PE ratio (earnings are selling cheaply), a high dividend yield and low price to net tangible assets ratio (assets are selling cheaply). This data is readily available in the Australian Financial Review tables on Mondays or in Shares magazine tables sections. Opinions vary as to what parameters to use, but a PE ratio below 10 times earnings, a dividend yield over 5% and a price less than the net tangible assets per share would be seen by most people as being conservatively valued, if not indeed cheap. The basic idea then is that shares of a conservatively valued company will fall less in price in a bear market than a company whose shares are significantly over valued.
Nature of the business is more difficult to assess because it requires experience and judgement. What we are looking for is a business whose sales and profit margins are fairly constant no matter how difficult trading conditions become. Classic examples in the past have been food retailers and manufacturers, because people have to eat, even if many other things are cut out of their discretionary spending patterns. Another defensive category in the past has been breweries and even cinemas because people seek escape from hard times. Maybe these will be joined by wineries, casinos and TAB companies in future?
Cyclical: This word is based on the root idea of a cycle - something which goes up and down in regular or irregular waves of some kind. In financial markets, it refers specifically to the business cycle. The business cycle is not a regular, exactly repeating cycle, though many people keep trying to find the magic formula that will enable them to predict it. They won't find it, because it does not exist. However, that is a side issue, the main idea is that we can observe waves of economic expansion, followed inexorably by periods of economic contraction - good times, followed by bad times.
A cyclical stock is one whose earnings stream, and therefore presumably the price of its shares, swings up and down with the business cycle. When times are good, profits expand and when times are bad, profits fall away and may become losses. To identify a cyclical stock, we are to some extent looking for the opposite of a defensive stock. We are looking for a stock which is very dependent on the level of economic activity in the economy. Classic examples are building and construction companies and the companies that supply them. Also capital good manufacturers will be cyclical, because new capital goods are mainly purchased when demand is growing and new capacity is required to keep production up to demand. Resources stocks and the companies that supply them will also be cyclical.
It will be obvious from this that defensive stocks and cyclical stocks are to some extent opposite ends of a continuum. They are the clear extremes. A pure defensive stock has rock solid earnings no matter how bad conditions are. A pure cyclical stock has earnings that react immediately and significantly to changes in the level of economic activity. These extremes are clear ideas, but it is very difficult to find a perfect example. Instead, we are looking, in the real world, at stocks that are more or less defensive, or more or less cyclical. All stocks are to some extent cyclical, but some are far more so than others.
Banks: It is interesting that you mentioned banks as an example of a defensive stock. This is a favourite subject of mine. I have no wish to start a run on banks, but I hold quite a different opinion to many people as to the safety of banks. A bank is fundamentally an unsound financial structure - it borrows short and lends long. It is highly dependent on confidence, because no bank can repay all its depositors at any one time, if pressed to do so, such as in a "run on the banks". Banks are highly leveraged and carry more financial risk than any other sector except finance companies, which are their close cousins. Banks are high risk and history is littered with bank failures. This is why they tend to trade at low PE ratios and high dividend yields relative to the rest of the industrial stock sectors. These valuations are a providing a premium for higher risk.
Banks are also very cyclical. They make money by borrowing and lending. If times get tough, there is reduced ability to fund borrowings, so bank lending falls away. They will also find an increase in bankruptcies among their borrowers and others which are in distress and become "non-performing", a neat way of saying the bank has chosen to ignore their failure to meet interest payments and/or capital repayments in the short term in the hope they will come good in time. This impacts directly on bank profits. Conclusion: banks are not defensive stocks and are quite cyclical.
I hope this has clarified these matters for you.