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Figure 2 displays commodities sector returns over five-year intervals from 1960 through early 2012. The sector returns are often quite different. For instance, from January 2000 to December 2004, the energy subindex outperformed the grain index by 236 percent. These divergences raise the prospect that different fundamentals drive the different subindex returns and that the subindexes may offer opportunities to investors over and above those of broadly diversified commodity indexes.
Figure 3 shows the average monthly commodities sector returns during various stages of the business cycle, as identified by NBER. The most salient feature is that all commodities sectors earn higher returns during expansions than during recessions. However, there are wide differences. Industrial metals and energy exhibit strong cyclicality, earning monthly about 3 percent more during expansions than during recessions. On the other end of the spectrum are grains and softs, which respectively earn monthly about 30 and 60 basis points more during expansions. In between are precious metals and livestock, which earn monthly about 1.5 percent more during expansions than recessions. Note that these returns do not reflect the returns of a trading strategy, as the NBER identifies business cycles after the fact.
These results are intuitive. The returns of grains and softs, which are staple foods, are much less sensitive to the business cycle than industrial metals and energy, whose usage vary with industrial activity. Livestock also contains basic foods, but its more cyclical behavior relative to the other foods may be due to it being more of a luxury. From a tactical standpoint, this suggests that an investor who believes that the economy is going to weaken should allocate away from industrial metals and energy toward agriculturals. Interestingly, though precious metals are often held out as a safe harbor to bad times, they return less to investors during recessions than expansions.