Why Copper Strength May Not Be for the Bulls

Copper strength has often led to stock market underperformance

Senior Quantitative Analyst
May 30, 2024 at 8:07 AM
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Copper has been shooting higher over the past few months, recently hitting an all-time high alongside stocks. The metal has many uses in several sectors, including factories, electronics, and power generation. Because of its multiple applications, copper is often considered a leading indicator for economic activity.

Naturally, this could be an argument for higher stock prices going forward. This week, I am looking at historical copper prices to see if a bullish copper market tends to lead to a bullish stock market. That is, especially when stocks were already performing quite well.


Stocks and Copper at All-Time Highs

The tables below show how the S&P 500 Index (SPX) and copper performed after both were within 1% of their all-time high  the first occurrence in a year). This signal flashed a couple of weeks ago for the first time since 2021.Stocks and copper both struggled over the next year after that signal.

SPX returns after the five dates in the table below show big 12-months returns of more than 25% -- two times after the 1995 signal and the 1954 signal. The three other times, stocks struggled with negative returns, including two double-digit negative returns.

Copper has struggled more than stocks after these occurrences. The metal was down four of the five times, with three of those returns showing losses of more than 10%.


Copper Up Big Through May

Copper is up more than 20% on the year. If copper is a leading indicator, I would expect bullish returns from stocks during the rest of the year. That is not what we've historically seen, though. The table below shows 14 years in which the metal gained 20% or more through the first five months.

The SPX averaged a negative return over the next month and three months. For the rest of the year, the index averaged a gain of just 2.5%, with 64% of the returns positive. That underperforms the other years (where copper is not up 20% or more) in which the index averaged a return of 5.5% for the rest of the year, with 73% of the returns positive.


Copper has also struggled in these situations. Years in which the metal gained 20% or more through May saw losses most of the time for the rest of the year. Copper averaged a loss of 5% for the rest of the year, with just 36% of the returns positive. Years in which it did not gain at least 20% through May saw copper average a 5% gain for the rest of the year, with 55% of the returns positive.


Pundits can say copper is a leading indicator, but these studies indicate copper strength has often led to stock market underperformance.


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