Low Oil and Copper Prices Tell Us Stock Market in Trouble

Dangers of Low Oil and Copper PricesTo see where the global economy is headed, I follow the prices of oil and copper. The prices of these commodities tell us about demand in the global economy. If the prices of oil and copper are rising, it means there’s prosperity. If the opposite occurs, it means industry (factories) is not busy and that a global economic slowdown is not far away.

With this in mind, below is the weekly chart of oil prices, where you’ll quickly see the collapse in prices.

Oil prices have been in a decline since mid-2013. June of this year was when we started to see a clear breakdown in prices; oil prices have declined 26% over the past five months. If we look at the troubles in the oil-producing regions of the Middle East and Russia, along with OPEC’s (Organization of the Petroleum Exporting Countries) recent pullback on oil production, we would expect to see oil prices rising. But the opposite is happening.

Hence, my belief that the severe decline in oil prices is a clear indication that the global economy is slowing.

Light Crude Oil - Spot Price Chart

Chart courtesy of www.StockCharts.com

Looking at copper, depicted in the following chart, we see copper prices collapsing as well…suggesting an economic slowdown is imminent.

Copper - Spot Price Chart

Chart courtesy of www.StockCharts.com

Since the beginning of 2014, copper prices are down 10%. Since the beginning of 2013, copper prices are down 21%. Copper is used across many industries; electronics and real estate to name just two. Declining copper prices tell us that factories aren’t close to running at full capacity.

If there’s an economic slowdown in the global economy, then expect the stock market to face scrutiny. The notion that American companies “will be fine” regardless of what happens in the global economy is ridiculous—especially since (in 2013) S&P 500 companies garnered 46.3% of their sales from elsewhere in the global economy. (Source: S&P Dow Jones Indices, September 2014.)

Dear reader, aside from the problem of a slowing global economy, stock market valuations are at extreme highs from a historical perspective. I continue to preach caution with the U.S. stock market. In my opinion, it’s just become one big bubble again, just like it became in 2007.