Dissecting the cycles: An intermarket investigation and its implications to portfolio reallocation

By applying spectral analysis, this paper discovered that: (1) bond, equity, and commodity markets followed regular cyclical patterns of the business cycle that lasted 3.5 to 7.5 years; (2) four significant lead or lag relationships existed between the business cycle and the three markets, where the business cycle led the commodity market, but first lagged the stock market and then the bond market, while the bond market led the commodity market. We also show that if investors can perfectly gage their positioning in the business cycle, they can enhance their returns by reallocating assets between bonds, stocks, and commodities in the portfolio accordingly.