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For the month of January, the S&P 500 ended up with a loss of 3.7% and S&P/TSX with a loss of 5.5%. January is typically positive and often used to gauge the mood of investors. The mood was anything but positive as the market suffered a one-two-three-four punch combination.
The ﬁrst punch occurred on January 12th when the People’s Bank of China (PBoC) instituted a tightening monetary policy by raising banks’ required reserve ratio by a half-point. This was PBoC’s ﬁrst meaningful move to tighten monetary policy in eighteen months. This was an attempt to cool the country’s 10.7% growth rate and to try to put a damper on rising commodity prices of which China is a large consumer.
The second punch was Obama introducing regulation to control bank operations and to separate banking and ﬁnancial divisions with banks. Although most agree that there needs to be some reform in the banking sector, the regulations introduced were reminiscent of the controlling Glass-Stegall laws of the 1930s.
The third punch was India tightening its monetary policy on January 29th, raising its cash reserve requirement for banks by 75 basis points to 5.75%. This increase was put in place to try and calm rising inﬂation in the country. India also warned that its next move will be an increase in interest rates.
The fourth punch has the rising risk of a possible default by the Greek government on its debt obligations. Although an imminent default is not likely, expect the Euro to come under pressure as more Euro countries face their high debt problems, such as Spain and Portugal.
There is currently a divergence between the North American economy and the sovereign debt issues of Europe. Earnings have been improving, employment has been increasing, the economy has been growing and at the same time the world has been focusing on the quagmire of the sovereign debt issues. If and when Europe is able to satisfactorily address the debt issues the market will swing
back to looking at the positives and will respond by moving upwards.
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Brooke Thackray is President of alphaMountain Investments, a firm that publishes investment reports and books. The main goal of the publications is to use seasonal analysis to give investors and money managers an edge in the markets.
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