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Market Round Up: January 2-6, 2012

General Comments

According to the “January Barometer,” the movement of the S&P 500  during January indicates the Market’s direction for the year.  There is some truthfulness behind this: the first week of trading, and the whole month of January, is often predictive of the year’s market movements.  Historically, 90% of the time if the S&P closes up in the first trading week of January, the index ends the year having made a gain. Results are less certain when the S&P closes down after the first week of trading, as it still ends the full year with gains 50% of the time.  As the S&P ended the week 1.6% higher, let us hope that this year is one of the 90% that follow this trend.

North American Markets

In the US, unemployment was down 200,000 jobs (meaning they added 200,000 jobs?). It’s a large enough change to drop the unemployment rate by 0.2% to 8.5%, the lowest it has been since February 2009.

This news did not have a profound impact on the market, however, as negative European economic news (for example, high yields on Thursday’s French bond auction) seemed to balance out any positive sentiment.  These numbers also failed to cause a rally  on Friday, and the Dow, S&P and TSX all closed down approximately half a percent. While these numbers did not have an immediate effect on the stock market, they have seemed to have a political impact, as several articles this week suggest that President Obama’s chances for reelection are rising as unemployment falls.

The Economist magazine decided to look at labour productivity, rather than job creation. It seems that in the US, worker productivity and efficiency remained high thoughout the recession. This is primarily because workers are “terrified” of losing their job, and organizational inefficiencies costing money are reduced.

How much longer increasing productivity in the US is possible, however, remains a question.

Last week Barclays lowered the buy ratings of Canadian banks to “neutral,” citing reduced consumer debt loads and narrow interest margins.  John Aiken, the analyst who changed the rating, said that this is a reflection of slowing earnings after two years of strong performance.

Several Canadian insurance companies and the larger Canadian financial sector were also downgraded. Meanwhile, RBC is bullish on the markets and upgraded the S&P, suggesting portfolios have an “above benchmark weighting in equities.

Analysts also believe that US banks will report lower than expected earnings later this month. Since the crises, Banks are trying to reduce their risk profile. Unfortunately, the recent market volatility increases trading risk, as the ability to sell a security at a certain price is less certain. Recent volatility has therefor resulted in fewer trades and reduced profit for banks.  Other methods of revenue, such as mergers and acquisitions, have also not been taking place as companies are choosing not to engage in M&A activities. New regulations, together with reduced earnings, are causing Wall Street to brace for a “Dismal 4th Quarter.”

Global Markets

Gold had an extraordinarily good trading day Tuesday, outperforming rising stocks. Analysts seem to be suggesting that gold will pass 2,000$ per ounce in 2012.  Some analysts even believe gold will reach as high as $2,500 USD per ounce.

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