Dr. Copper Has a Message Amid Signs of U.S. Economy Rolling Over
Amid rising economic uncertainty, Dr. Copper has been telling us that things could be coming to a head in the U.S.
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The bulk of stock market performance over the last few years has been dominated by a handful of names, namely the Magnificent 7, as they outperformed every other asset class and sector since October 2022, when ChatGPT first announced itself to the world, unleashing the wonders and the vast potential of the AI-driven world.
The exponential growth of large language models needing to process data at the speed of light demanded faster and faster chips to process. This caused one of the largest technology bull markets since the 1990s. However, since the start of this year, tech stocks have not really done much.
The Magnificent 7 index is up a mere 1% versus the Chinese and European indices, up 10% to 15% and it is only February! Even so, these indices are down substantially over the past few years, and needless to say, valuation is at a fraction of the multiples versus the U.S.
Price moves are sometimes more about positioning than fundamentals themselves. Investors have been massively underweight Europe and China for the longest time, more so with the latter due to secular stagnation since the COVID-19 pandemic.
The property market collapse and post-deleveraging world saw a severely-indebted and -dented consumer unable to spend. Demand from China and its property market make up about 40% of its near-term demand, which has capped copper's price. The longer-term thesis on its EV/clean transition aided copper, but Chinese demand has remained muted and this was evident in oil markets too as OPEC+ has waited for Chinese demand to return for most of the past two years to no avail.
As the year has started, in lieu of Trump tariffs, we saw imports pick up into China perhaps in anticipation of the tariffs. So, the December and January data has shown improvement, but it remains to be seen whether it is transitory or the start of a new pick up in global manufacturing.
On these hopes, investors have rotated out of U.S. markets and into the other sectors seeking a broadening out of the rally. This took all "value" names higher versus “growth,” as money rotated out of the large-cap tech names.
Copper is up 7% year to date. But following the Trump tariffs, there will arguably be a slowdown in global trade. After years of excess fiscal and government spending to just keep things afloat, now with DOGE trimming the fat in government deficits, there is bound to be repercussions. We saw the services PMI showing contraction, along with other indicators, there are signs the U.S. is rolling over.
With an economy so levered on cheap capital, and with U.S. national debt rising by $100 billion every day (aka, "the Biden world"), it is no wonder that now, as DOGE comes in, we will see slower and softer growth.
The bond market is already picking up on this as yields move to new lows. Perhaps this is Trump’s plan all along, to engineer a soft recession or at least hints of a slowdown. After all, how else will he be able to convince Fed Chair Powell to get "rates lower"?
