Copper's Fall May Not Matter for Stocks

Studying past instances of weakness in copper

Senior Quantitative Analyst
Feb 26, 2020 at 8:00 AM
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Stocks continue to pull back with uncertainty surrounding the coronavirus. A pullback may not be a big surprise to those who subscribe to the Dr. Copper theory. Copper is a popular metal in a variety of areas of the economy. Investopedia says “… from homes and factories to electronics and power generation and transmission – demand for copper is often viewed as a reliable leading indicator of economic health.” For that reason, copper is said to have a PHD in economics and hence, the title Dr. Copper.

The chart below shows copper is down big already year-to-date. I’ve learned that narratives, such as the Dr. Copper narrative, often do not stand up well to scrutiny. This week I look at a history of copper pullbacks to see if they have tended to lead to stock market losses going forward.

Copper SPX feb 25 1

Copper Falls Early in the Year

We have daily copper spot prices going back to 1971. I looked back to then and found times that copper was down at least 3% at this point in the year. There were 10 instances when this happened. The table below summarizes how the S&P 500 (SPX) performed after those occurrences. The second table below shows typical index returns for comparison. For that table I went back to 1982, the year of the first signal.

This does not look to be any sort of sell signal for stocks. The returns over the next one, three and six months are in line with typical market returns. When you look at the returns for the rest of the year, stocks have been rather impressive when copper suffers a big drop early in the year.

SPX 3 percent feb 25 2

Here are the individual returns when copper is down 3% or more at this point in the year. The last time this happened was 2015. Stocks struggled after that signal for the rest of the year. The returns before that were generally bullish.

SPX YTD feb 25 3

Copper Falls Stocks at Highs

Copper prices fell before the recent pullback. I thought it was interesting that the S&P 500 was hitting an all-time high while copper had made a significant pullback. Here’s another way I looked for evidence that copper would affect stocks going forward. I looked at times when the S&P 500 was hitting a record high while copper was at least 10% off its high over the past month.

This actually signaled early in the month on Feb. 5. There were six other times stocks resiliently hit all-time highs during a sharp pullback in copper prices. There aren’t many data points to draw strong conclusions but again, it doesn’t suggest there’s an increased chance of a pullback. After the previous six occurrences, the S&P 500 tended to perform as it typically does.

SPX copper pullback feb 25 4

Here are the individual returns after these signals. You must go all the way back to 2007 for the last occurrence. That was about six months away from the major market top just before the financial crisis. Before that, however, it happened a few times in the mid-1990’s, which were very good times for stocks.

iotw feb 25 final


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