Stock, Bond, Commodity Markets All Signaling Recovery, Part 3

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Posted: Sep 04, 2020 10:16 AM
Stock, Bond, Commodity Markets All Signaling Recovery, Part 3

Source: AP Photo/Richard Drew

We've looked at how stock markets are signaling a U.S. recovery and how bond markets are signaling the same thing, but even more so. Now let's look at Dr. Copper.

Copper is sometimes nicknamed Dr. Copper because some consider it to be better at forecasting global growth than most economists. That may or may not be true, but the nickname helps us remember why we're looking at Copper prices.

Let's look at copper prices over time:

(Source: Bloomberg, as of August 2020)

Seems as though there might be something to this nickname. Copper boomed when the economy boomed after the Bush tax cuts. It crashed during the Great Recession. It boomed as we came out of that, then fell during the years of the European Debt Crisis. It boomed after the Trump tax cuts and subsequent economic growth spurt and crashed during the worst of the Pandemic Crisis, but since then has been coming back.

So at first glance, it seems to move in sync with global growth. Let's take a more rigorous look and rearrange the data so that instead of going from earlier to more recent, it goes from lowest price to highest. We also did some adjustments to account for inflation and supply issues. Here's what it looks like:

(Source: Bloomberg, as of August 2020)

Looks pretty good. Clearly low prices (over at the left) tend to coincide with low growth (towards the bottom), and vice versa. There is a clustering of data points in the lower left and in the upper right, which means a positive correlation. When our prices (adjusted for inflation and supply) are higher, global growth tends to be higher and vice versa. This makes logical sense. As the global economy grows, there is more demand for wire and pipe and various electronic components. Copper is a very useful industrial metal and when industry is booming, the economy wants it more. Dr. Copper seems like she deserves her honorary degree. And she seems to be staking her credibility on a global recovery.

Markets can of course be wrong. That's why there are bubbles. That's why there are busts. But as we've seen they often get the direction right. Markets are made up of all of us and all of us know more than some of us (including the some of us who are experts in economics). Growth sensitive market metrics are signaling a recovery and they're doing it not just by making predictions, but by voting with their dollars, putting their skin in the game. It would not be wise to write them off.