Dr. Copper’s advice about the stock market is a waste of your pennies


TedsWoodworking Plans and Projects

One of the most bearish forecasts for stocks nowadays is coming from Dr. Copper, though it’s not clear that you should place much importance on it.

By “Dr. Copper,” of course, I’m referring to copper’s alleged ability to forecast the economy in general and the stock market in particular. Many years ago, some on Wall Street became so impressed with copper in this regard that they concluded the metal must have a Ph.D. in economics.

Perhaps Dr. Copper should go back to grad school. Copper prices hit a high in early 2011 and have declined steadily since — now down 40% from that peak. Over this same period, both the U.S. economy and the stock market have steadily risen: U.S. GDP is 38% higher, while the S&P 500

SPX, +0.89%

 (with dividends reinvested) is up 163%.

Yet old beliefs die hard. One of the newsletters I regularly read claims that copper prices over the past couple of years have been the single-best leading indicator of the stock market.

That’s news to me. To make sure I’m not guilty of cherry-picking the data in order to make Dr. Copper look bad, I fed into my PC’s statistical package copper prices over the past four decades, along with the S&P 500. I then measured the correlation between copper’s trailing prices over various periods (from as short as the trailing month to as long as the trailing two years) to the S&P 500’s subsequent returns (over periods as short as the following month to as long as two years).

I came up almost completely empty at standard levels of statistical significance. Perhaps even more importantly, there were many instances in which the copper-stock correlations were inverse — in which copper’s trend was in the opposite direction of the stock market’s subsequent move. That’s directly contrary to the story told by those who insist that the metal has a Ph.D. in economics.

What accounts for these findings? One is that copper’s direction means different things at different times, according to an academic study several years ago that circulated on the Social Science Research Network. The professors who conducted that study found that, during recessions, a rising copper price is good news for the stock market — but that it’s bad news during economic expansions.

In other words, you have to first know whether the economy is expanding or contracting before you can properly translate copper’s price into a stock market forecast. This helps to explain why Dr. Copper has had such an awful forecasting record over the last decade, during which the economy has been expanding and, sure enough, a lower copper price has been good rather than bad news.

Another reason copper has struggled as a leading indicator: The relationship between the economy and the stock market is a lot more tenuous than widely assumed. So even if copper were a good leading indicator of the overall economy, it wouldn’t necessarily be a good leading indicator of the stock market.

In fact, a number of academic studies over the years have found an inverse relationship between countries’ GDP growth rates and the returns of their stock markets. Other studies have found no statistically significant relationship one way or the other. (Read this recent article in the Financial Analysts Journal that reviewed these various studies.)

The bottom line: copper’s 40% decline since 2011 is no reason to worry about stocks.

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

More:   A group of superrich investors, spooked by China and potential ‘black swans,’ raises cash to levels not seen in years

Also read:  ‘Godfather’ of chart analysis says Wall Street shouldn’t bet on stock-market records anytime soon

Source link


Please enter your comment!
Please enter your name here