The day after Donald Trump was elected president on November 8th 2016, copper prices jumped about 3.5%. The stock market proceeded to rally 4.5%, the following month. This begs the question, can copper prices predict stock market gains or losses?
Obviously, an economy that is growing, will need more copper. It is one the most widely used industrial metals. However, there are some things to think about, when considering whether a move in the price of copper can predict future stock market moves.
Copper prices do not necessarily go up when there is more demand for copper. If there is more supply, they could stay the same, or go down. The stock market doesn’t necessarily go up or down based on economic growth. From 2008 to 2016, there was tepid economic growth, and the stock market went up. Also, not all large cap stocks are dependent on copper. How much copper does Facebook use?
The chart below shows copper prices vs. the S&P 500 from 1989 to 2016.
The stock market and copper seem to divert in price from 1990 until 2000. Then, starting in 2001, they move in tandem, until the end of 2011. Then the relationship diverts again.
So, from a higher level, the relationship between the stock market and copper seems to go through phases. It is positively related sometimes and negatively related others. But there is a relationship.
Over the last month both copper and the stock market have risen. Are they moving in tandem again? I think it’s possible. A lot of the dynamics of the United States economy have changed recently. The Fed is in tightening mode and there is a new presidential administration, set to take office in January.
How about if we look at only industrial companies, since they are the ones that will be the primary consumers of copper? For this comparison I use the iShares Industrials ETF. This is a popular ETF that contains only industrial companies.
In this case, the positive relationship hold throughout. The prices for this ETF only go back to 2000.
Understanding that there is a relationship between copper prices and the stock market is great, but can we predict the direction of stock prices based on price moves in copper.
In order to test that, I took the weekly change in copper prices, from 1988 until now. What I am looking for are large price moves in copper. A one standard deviation move over that time frame is 3.63%. That would imply a move in price that is greater than 68% of the dataset. There are 390 days that meet this criteria.
There are 185 of these moves between 2001 and 2011, where I determined the relationship between copper and stock prices to be positive. 107 up days and 78 down days. Of the up days, the S&P 500 is higher 62 times a month later and down 42 times. Of the down days, the S&P 500 is up 49 times a month later and down 29. I don’t think that proves much, considering there are 831 S&P up days compared to 651 down days during that period.
I also got similar results using the iShares Industrial ETF.
So, it looks like it is difficult to use large price swings in copper to predict future prices in stocks.
Well, yes. They help explain what is going on in the market. For example, our comparison between the overall stock market and copper and just industrial companies and copper. There is a stronger correlation between industrials and copper, then the overall stock market. Copper prices have rallied recently, indicating industrials are doing better.
Maybe we should dig deeper, to the micro level and try and find stocks that will benefit from this, but haven’t fully priced that in. Or, stocks that use copper as an input, could benefit when copper falls in price.
Although I have not found a correlation between large moves in copper prices and future U.S. stock prices, maybe there is a correlation in other types of securities or other countries stock markets. China is the largest consumer of copper. Maybe there is a relationship there. These are things I will explore in future articles.