Market finally gets a chance to catch its breath

01 Feb '08

3 min read

With fears abound that the US and perhaps the world economy are headed for a recession and that consumer spending may drop considerably, some of these Ag markets are starting to look a bit toppy and we may therefore expect a pullback over the next few weeks.

Since a US recession seems to be in the cards, let's have a look at how commodities have performed in previous economic downturns. A study by Yale of a few years ago has analyzed how commodity futures compared to stocks between 1959 and 2004.

Not surprisingly, the study confirmed that stocks and commodities have a negative correlation, meaning that commodities tend to show strength when stocks display weakness and vice versa. Commodities do relatively well during economic downturns, especially when inflation is present. While stocks and bonds move down in the face of inflation, commodity futures typically rise with inflation.

However, there are wide disparities within the commodity complex. For example, while food related commodity futures showed positive returns both during the expansion and recession phase, cotton was doing quite well during expansions (up 13.1% on average) but pe

rformed poorly (down 4.7% on average) during recessions. Therefore, the study seems to confirm conventional wisdom which states that people need to eat no matter what, while they cut spending on apparel and home textiles when times are tough.

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