Why Copper Is One Of The Best Macroeconomic Indicators

Copper prices are one useful, under-the-radar indicator for investors to use as a gauge of U.S. economic health. Despite downward pressure on stock prices so far in 2022, copper prices have held up relatively well, a trend that has been reflected in the strength of underlying U.S. economic numbers.

In the past year, the SPDR S&P 500 ETF Trust SPY has generated a 16.9% total return, while the United States Copper Index Fund CPER has returned 21.7%. Year-to-date in 2022, the SPY fund is down 5.8%, but the CPER fund has drifted higher by 0.5%.

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Why Copper Matters: Copper is commonly used in a number of different industries, including construction, industrial production, electronics and power generation and transmission. As a result, copper demand can be used as a gauge for economic growth, and copper prices have a high historical correlation to the world Business Confidence Indicator.

The Portfolio Visualizer daily return correlation matrix suggests the SPY and CPER funds have a relatively high level of positive correlation in daily returns over the last five years. The two funds have a correlation of about 0.38.

Copper's outperformance relative to stocks prices so far in 2022 makes sense based on what dynamics are driving the sell-off in stocks. Stock prices are largely dropping over concerns about rising interest rates and Federal Reserve tightening rather than weakness in underlying U.S. economic data. In fact, the U.S. added 467,000 jobs in January, beating consensus economist estimates of 150,000 jobs.

Benzinga's Take: Copper prices are benefitting from both underlying economic demand and elevated inflation rates, which serve as a tailwind for commodity prices. However, the Federal Reserve plans to curb inflation in coming months, and rising interest rates could eventually weigh on economic growth and copper demand.