Does a copper rally lead to a bullish stock market?
After five years of declines, copper prices stabilized in 2016, and have surged higher recently, now approaching a three-year high. The metal is used for many things, including factories, electronics, and power generation. Due to its wide use across many sectors, copper is often considered a leading indicator of economic activity. Naturally, this could be an argument for higher stock prices going forward. This week, I will look at historical copper prices to see if a bullish copper market tends to lead to a bullish stock market.
Copper’s 1-Year Return Since 1975
Copper has been extremely strong over the past year, gaining 45%. According to our theory, a strong demand for copper foretells a strong economy, which should thus bolster stock prices. I went back to 1975 to see what one-year copper returns have meant for the S&P 500 Index (SPX) over the ensuing year.
In the table below, the far left column shows the 12-month return for copper. The rest of the table shows S&P 500 returns over the next 12 months. If our theory that strong copper demand leads to a bullish stock market is correct, then we should see better returns for the S&P 500 at the bottom of the table. Interestingly, the highest average S&P 500 return interestingly comes when copper has performed the worst over the previous 12 months. However, this does not dismiss our theory just yet. The high average return could be a function of the indicator capturing strong bounce-back rallies after crashes.
In our current situation, in which copper is up 45% over the past year, stocks do quite well going forward. In the table below, you see the S&P 500 averages a gain of more than 11% over the next year, with 88% of the returns positive, going back to 1975. The consistency of the stock returns is best when copper has had a strong 12 months, as measured by the percent positive and standard deviation of returns.
Copper's 1-Year Return Since 1990
Things are different now than in the 1970s and 1980s. I wanted to see how this data looks using more recent time frame. The table below is the same analysis as above, except since 1990. The results are similar. When copper performs its worst, then the S&P 500 has its highest average return going forward. When copper has done the best, which is our current situation, then it too has been beneficial for stocks; the S&P 500 has averaged a 12% 12-month return with an impressive 93.6% of the returns positive.
