Return Predictability When News Means Different Things in Different Times
Return predictability can vary across the business cycle due to the same news conveying different information in different states. Industrial metals such as aluminum and copper contain information about the economy, which gradually diffuses into the equity market. Industrial metal price increases are good news for equities during contractions as investors take this as a signal that growth is emerging. However, increases during expansions can signal an overheating economy and are seen as negative for equities. Whether one finds positive, negative or no predictability depends on the number of expansion versus contraction states in the sample.
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