FA Center: If ‘Dr. Copper’ is your source for information about the stock market’s health, you’d better get a second opinion

by | Jan 30, 2023 | Stock Market

Anyone who believes copper’s 25% rally over the past six months is bullish has a short memory. Just this past summer copper
was smarting from a 25% plunge. If copper were a reliable leading indicator, both the U.S. economy and stock market would be much lower than they were last summer. Instead, U.S. GDP rose at an inflation-adjusted annual rate of 6% in the third and fourth quarters of 2022. The S&P 500
now is more than 7% higher than at 2022’s midyear mark.

Though these are just two data points, they should sound alarm bells for those who believe “Dr. Copper” has a Ph.D. in economics. Shooting down that myth doesn’t mean the outlook for the U.S. economy and the stock market isn’t better than it was last summer. It may be. The point is that any improvement has nothing to do with the price of copper. To test whether Dr. Copper’s failed diagnosis last summer is the exception or the rule, I measured whether the S&P 500 tends to move up or down in synch with copper. Such a test measures copper’s record as a coincident indicator. Specifically, I measured the correlation between the two assets’ trailing one-year returns, over rolling five-year windows. What I found is plotted as the red line in the accompanying chart.

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