Intermarket Analysis and the Business Cycle. Over the past two centuries, the American economy has gone through repeated boom and bust cycles. Sometimes these cycles have been dramatic (such as the Great Depression of the 1930s and the runaway inflationary spiral of the 1970s) | 224 COMMODITIES AND ASSET ALLOCATION portfolio managers becomes more realistic. The high correlation of the CRB index to inflation gauges qualify commodities as a reliable inflation hedge. Futures markets including commodities currencies bonds and stock index futures provide a built-in forum for asset allocation. Because their returns are poorly correlated with bond and stock market returns professionally managed futures funds may qualify as a legitimate diversification instrument for portfolio managers. There are two separate approaches involved in the potential use of futures markets by portfolio managers. One has to do with the use of professionally managed futures accounts which invest in all four sectors of the futures markets commodities currencies bond and stock index futures. In this sense the futures portfolio is treated as a separate entity. The term futures refers to all futures markets of which commodities are only one portion. The second approach treats the commodity portion of the futures markets as a separate asset class and utilizes a basket approach to trading those 21 commodities included in the CRB Index. 13 Intermarket Analysis and the Business Cycle Over the past two centuries the American economy has gone through repeated boom and bust cycles. Sometimes these cycles have been dramatic such as the Great Depression of the 1930s and the runaway inflationary spiral of the 1970s . At other times their impact has been so muted that their occurrence has gone virtually unnoticed. Most of these cycles fit somewhere in between those two extremes and have left a trail of fairly reliable business cycle patterns that have averaged about four years in length. Approximately every four years the economy experiences a period of expansion which is followed by an inevitable contraction or slowdown. The contraction phase often turns into a recession which is a period of negative growth in the economy. The recession or slowdown inevitably leads to the next period
