Are Commodities Signaling a Shift Away US Equity Leadership?
Most commodities have suffered lately with the backdrop of tariffs and China’s devaluation. But some have fared worse than others, and there is information content to the relative move in commodities. While copper catches many of the headlines (i.e. Dr. Copper, the metal with a Ph.D in economics) the most significant decline has occurred in lumber.
In general, copper goes into infrastructure kinds of fixed investments, things like the electric grid or telephone backbone. As the old joke goes, “where is the biggest copper mine?… under Manhattan.” Lumber, on the other hand, is used primarily in residential construction. Since most of the copper-intensive investments are going on in Asia and other developing markets, it is fair to say copper is a good proxy for economic activity outside the US. And since according to Edward Leamer’s working paper Housing IS the Business Cycle, it is fair to say lumber is a proxy for the health of the US economy. Not perfect, but a good shorthand.
I construct a simple ratio of lumber to copper prices as a proxy for the health of the US vs. the rest of the world. In the next chart, I overlay the ratio on the performance of our KLSU Americas Index (top 85% of companies in North America) relative to the performance of our KLSU DM Index (top 85% of market cap of 22 developed countries). Each index is measured in USD and market-cap weighted. For the most part, oscillations in the lumber/copper ratio coincide with the relative performance of US stocks relative to the Developed World. From this perspective, the recent drop in the copper/lumber ratio should raise some red flags when thinking about continued US equity leadership.