Blog

Dr. Copper and Mr. Market

Copper is said hold a PhD in economics, its price movements containing key information about the U.S. stock market and the economy.

With the sharp decline in the metal of late (52-week low, down 17% YTD), many are suggesting this is a negative omen. Does the historical record confirm this assertion? Let’s take a look.

Data sources for all charts/tables herein: stockcharts.com, bloomberg.

Dr. Copper and Mr. Market

Since 1972, the correlation between the return of Copper in a given year and the return of the S&P 500 is essentially 0 (0.08). In plain English, that means it’s a coin flip as to whether they will move in the same direction (they have in 53% of years).

But surely Copper being up better for the S&P 500, right? Not necessarily. The opposite has actually been true on average. The S&P 500 has gained 12.3% annualized in years when Copper is down versus only 9.0% when Copper is up.

Yes, there are many times when Copper and stocks have moved together (longest run: 2003 – 2010). But “moving together” at times is much different than saying they “have to” or are “likely to” move together.

If you tell me Copper is going higher next year (ex: 2003-07), I would say the odds favor the S&P 500 is going higher as well but I would make the same prediction if you told me Copper was going lower (ex: 1995-98). The corollary: Copper tells you next to nothing about the direction of the S&P 500. They move together at times, and they move in opposite directions at other times.

What about the U.S. economy?

Is Copper a better signal there, given its doctorate in economics?

Not exactly. The calendar year correlation between Copper and U.S. Real GDP is slightly negative (-.04).

Similar to U.S. equities, that does not mean there aren’t times when Copper is down and the U.S. Economy is in recession. There are. We last saw that in 2008 during the global deflationary collapse and this is what many point to at the first sign of weakness in Copper.  What they fail to report, though, is the much more common occurrence: when Copper is down (Ex: 1983-84, 1995-98, 2013-15) and no recession occurs.

Even in the classic example of 2008, Copper did not peak until July, when the U.S. economy was already 7 months into a recession. What value did it provide at that point? Certainly no more than the U.S. stock market itself which tends to peak ahead of U.S. recessions (October 2007 in this case).

copper4

Evidence > Opinion

Why, then, is “Dr. Copper” is widely used by pundits as an “important signal,” often as a harbinger of doom? Because it is their job to entertain, and Dr. Copper has a nice ring to it.

But isn’t Copper used in many parts of the economy (homes, factories, electronics, etc.) and therefore a gauge of demand and growth?

Yes, it absolutely can be at times but it is just one gauge among many in what is a complex and diversified U.S. economy and stock market. Also, the price of Copper responds to not just demand but supply as well and it is not always easy to differentiate between the two.

So is the recent decline in Copper bad news for the U.S. stock market and economy? You are now equipped to answer that question using evidence instead of opinion.

Related Posts:

Does the S&P really need higher Oil?

Should Equity Investors Fear King Dollar?

CHARLIE BILELLO, CMT

Charlie-Bilello

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Charlie is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Charlie holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and also holds the Certified Public Accountant (CPA) certificate.

In 2017, Charlie was named the StockTwits Person of the Year. He has been named by Business Insider and MarketWatch as one of the top people to follow on Twitter and his work has been featured in Barron’s, Bloomberg, and the Wall Street Journal.

You can follow Charlie on twitter here.

Disclosures:

Pension Partners, LLC is a federally registered investment adviser under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. For more information about Pension Partners please visit: https://adviserinfo.sec.gov/ and search for our firm name.

The information herein was obtained from various sources. Pension Partners does not guarantee the accuracy or completeness of such information provided by third parties. The information given is as of the date indicated and believed to be reliable. Pension Partners assumes no obligation to update this information, or to advise on further developments relating to it.

Past performance is not indicative nor a guarantee of future results.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

 

Facebooktwittergoogle_plusredditpinterestlinkedinmail

Comments are closed.