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A reader inquired: "Do copper futures reliably lead the market, as some believe." The hypothesis is that demand for copper is a reliable leading indicator of economic activity and therefore aggregate equity prices. In lieu of a long-run set of copper futures data, we use monthly prices for copper base scrap (not seasonally adjusted) from the "Metal and Metal Products" group of the Producer Price Index components. This series extends back to 1957, allowing comparing across multiple economic expansions and contractions. Comparing the behavior of quarterly copper base scrap prices to quarterly levels of the S&P 500 index for 1957-2007, we find that...
The following chart shows on log scales the quarterly behavior of the S&P 500 index and copper base scrap prices across the entire sample period. Visual inspection indicates no systematic relationship between the two series, except that both tend to rise over time.
For more precise analysis, we compare quarterly changes in the two series.
The following scatter plot relates quarterly changes in the S&P 500 index to changes in copper base scrap price for the same quarters. The Pearson correlation for the relationship is 0.04 and the R-squared statistic is 0.00, indicating no contemporaneous relationship. Subsamples spanning 1957-1979 and 1980-2007 produce similar results. The concurrent movements of the two series are essentially independent.
Is there any evidence that copper base scrap price leads or lags the S&P 500 index?
The final chart summarizes the correlations between quarterly changes in copper base scrap price and the S&P 500 index for various lead/lag relationships, ranging from the S&P 500 index leads by eight quarters to copper base scrap price leads by eight quarters. Sample sizes range from 196 to 204 quarterly observations, depending on the magnitude of the lead/lag interval. There is a very slight indication that the S&P 500 index might lead copper base scrap price by one or two quarters, but the correlations are very weak.
The largest magnitude correlation is for the assumption that copper base scrap price leads the S&P 500 index by one quarter ("1"). However, the Pearson correlation for this relationship is just -0.17, with an R-squared statistic of 0.03. These results suggest that the S&P 500 index next quarter has a slight tendency to move opposite the direction that copper base scrap price moved last quarter, with just 3% of the variation in the index explained by the prior-month variation in copper base scrap price.
In summary, evidence from simple tests indicates no tradable lead-lag relationship between the price of copper and a broad stock market index.
For related research, see Blog Synthesis: The Economy and the Stock Market.
