Copper prices aren't the bullish indicator it used to be
Subscribers to Chart of the Week received this commentary on Sunday, July 13.
You should know by now to expect the unexpected with the stock market as it pertains to the Trump administration. The Aug. 1 deadline for tariffs announced on Tuesday took investors by surprise, but the real kick in the teeth was the sudden 50% tariff on copper imports. The commodity surged in response, which brought the old ‘Dr Copper’ adage into play.
For the uninitiated, 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 -- hence the metal’s MD. But does a shock pop like Tuesday’s really lend weight to the theory that market conditions are suddenly ideal?
Tuesday’s movement was historic on many levels. It was the sharpest single-session gain since 1989. The gap between U.S. Comex futures and the London Metal Exchange split open to a record high. Per Benchmark, U.S. consumers could be paying around $15,000 per metric ton for copper, while the rest of the world pays around $10,000, assuming the 50% tariff rate comes into effect at the start of August. Given that the U.S. imports half of the copper it consumes, this was a potential paradigm shift.
However, the mining sector didn’t respond in the way you’d think, though. Freeport-McMoRan Inc (NYSE:FCX) added 2.5% on Tuesday, paring much larger, earlier gains. Southern Copper Corp (NYSE:SCCO) traded as high as $109.40 but finished the day 1.4% lower. The Materials Select Sector SPDR (XLB) exchange-traded fund (ETF) followed a similar pattern; outsized gains Tuesday and subsequent profit-taking and consolidation on Wednesday. The SPDR S&P Metals & Mining ETF (XME) moved lower on Tuesday by 0.8%, because while the tariff rhetoric whiplash may have been a boon for copper specifically, it did a number on safe-haven assets like gold.
The fact that the copper mining sector wasn’t transformed overnight -- a la MP Materials (MP) after its lucrative Pentagon partnership -- speaks volumes. Rare earths may be important, but copper is quietly just as vital to artificial intelligence (AI), semiconductor, and electric vehicle (EV) development. If copper stocks can’t wake up for a tariff tailwind, then what can it get up for?
Copper is vital to the U.S. economy but its strength does not beget stock market strength. Per Schaeffer’s Senior Quantitative Analyst Rocky White, there have been nine moves of 10% or more from copper since 1980, and six coincided with a daily loss from the S&P 500 Index (SPX). The SPX struggles after a 10% daily move or more in copper, with an average six-month loss of 0.4% that pales in comparison to the average anytime six-month returns of 5.1%. The SPX underperforms during copper price spikes across all timeframes except that random one month window.
It’s not just moves of 10% or more. For a larger sample size, the tables below show the SPX and copper returns after the 50 biggest one-day returns in copper; essentially moves of 5.9% or more. The SPX performs poorly out to three months. At six months, the returns during copper price spikes look like normal market returns.
So while Dr. Copper may have had some merit in the past – the S&P 500 and Nasdaq are not far off record highs. After all -- large spikes typically spell trouble for stocks.
It’s an equally as ominous signal for copper prices if you’re taking a flier on the sector’s stocks. Per the tables below, the average returns for copper prices after large daily moves drastically underperforms the anytime price moment, since 1980. Once more there’s a little stabilization with the six-month returns of 7.6%, but the red ink across all other time frames is enough of a short-term alarm. Given how copper mining stocks react positively to upward moves in the metals pricing, you can assume that this also spells trouble for FCX, SCCO, and sector peers.
As of Thursday, FCX and SCCO got another boost after President Donald Trump reiterated that the 50% tariff would go into effect on Aug. 1. While it’s tempting to take a flier on a stock like FCX given its role in any potential shift in mining exposure, assigning any larger macro market signal to copper seems like a stretch, given the quantitative data stacked up against it. Dr. Copper had a good run, but it might be time to enjoy retirement.