As you probably know, commodity prices have been falling significantly over the past few months on Trump’s trade war, which has caused the U.S. Dollar to rise.
This has some bearish investors afraid of a few things:
- “Contagion” from commodities and emerging markets to the U.S. stock market
- An economic slowdown, because commodity prices are “supposed to” reflect economic data. Conventional thinking states that falling commodity prices = falling demand, which signals a slowdown in the economy.
These 2 fears are unsubstantiated. Commodity prices are driven by their own supply and demand. These days, commodity demand has more to do with China than the U.S. Hence, falling commodity prices is more symbolic of problems in China (and emerging markets) than the U.S.
Here’s the data to prove it.
Copper has now fallen 9 out of the past 10 weeks. This is what happens next to copper (historically)
Click here to download the data in Excel
This is what happens next to the S&P 500 when copper falls 9 out of the past 10 weeks.
Gold is on the verge of closing down 5 months in a row. This is a rare sign of extreme weakness in the precious metals markets.
Here’s what happens next to gold when it goes down 5 months in a row
Here’s what happens next to the S&P 500 when gold goes down 5 months in a row.
Click here to download the data in Excel.
Don’t get too bullish on commodities just because they have crashed. “Oversold” can become even more oversold.
But more importantly, U.S. stock market investors should ignore the weakness in commodity prices. Copper is NOT a useful indicator for the U.S. stock market.
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