Commodity prices are signaling this year’s rally in U.S. stocks will fade, according to Gina Martin Adams, a Wells Fargo & Co. strategist.
The CHART OF THE DAY shows how she drew this conclusion: by comparing the ratio between copper and crude-oil futures with the Standard & Poor’s 500 Index.
“When copper is accelerating faster than oil prices, stocks tend to do particularly well,” Martin Adams wrote two days ago in a report with a similar chart. “Much the opposite has been the case recently.”
From this year’s peak on Feb. 6, the ratio fell 9 percent through yesterday. The S&P 500 advanced 4.6 percent during the same period.
“The direction of copper is historically one of the best leading indicators” of global economic growth, the New York-based strategist wrote. This contributes to the copper-to-oil ratio’s usefulness as a stock-market gauge, the report said.
Price moves affecting the ratio can make or break earnings estimates, Martin Adams added. Her projection of $102 a share in S&P 500 profit this year assumes commodity costs will be little changed. Copper rose 11 percent for the year through yesterday, and oil rose 6.9 percent.