Copper's record as a stock market and economic predictor is tarnished

By Mark Hulbert

'Dr. Copper' is practicing without a license

Copper's recent surge to a two-year high is rekindling belief (and hope) in the urban myth that the metal is a good leading indicator for the U.S. stock market. But copper's actual track record is no better than a coin flip.

Consider the blue line in the chart below, which measures the correlation between the S&P 500's SPX return over a given one-year period with copper's (HG00) trailing one-year return. While copper in the 1990s did a decent job foretelling the stock market's subsequent performance, and again during the 2008-'09 global financial crisis, its track record the rest of the time has been dismal. The negative readings of the blue line indicate that there was an inverse relationship between copper and the S&P 500.

Since 1990, the correlation coefficient between copper's trailing year return and the S&P 500's subsequent-year return is statistically indistinguishable from zero.

This is not necessarily the final word on the subject, since copper could be a good leading economic indicator even if it's not a good predicter of the stock market's direction. After all, the relationship between the stock market and the economy is often inscrutable.

Unfortunately, there's little evidence that copper does any better job forecasting the U.S. economy than the stock market. As you can see from the red line in the accompanying chart, there is no consistent correlation between copper and GDP.

I was unable to determine the origins of the belief that Dr. Copper has a "Ph.D. in economics," as true believers often put it. The earliest mention of "Dr. Copper" in the New York Times archive was in January 1995, when an article quoted the late Barton Biggs of Morgan Stanley Asset Management saying the "great economist 'Dr. Copper' says that the world economy is strong and getting stronger."

Biggs was right about the strength of the global economy, which continued to soar through the end of the decade. But it's unclear the statistical evidence on which he based his prediction. As you can see from the red line in the chart, when Biggs made his prediction there was a strongly inverse correlation between copper's trailing price and the economy's subsequent strength.

Yardeni Research, in a note to clients earlier this month, asserted that copper's strength "may signal that the Chinese government has decided to offset the collapse of its property sector by stimulating the country's manufacturing for export of green technologies including solar panels, wind turbines, batteries and electric vehicles." Each of those technologies relies heavily on copper.

As for the global economy, Yardeni Research believes it "is still muddling along, but almost certainly not suddenly booming."

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com

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04-27-24 0900ET

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