US markets: The political factor

In the US, the big political news of the week was the results of the Iowa Republican caucus, the first step in the long road to determining the candidate that will oppose US president Barack Obama in November of this year.

While this didn’t appear to have much impact on the market, as more clarity develops as to the likely victor, I’m sure the market will express its feelings closer to the time. Noteworthy also is Mr Obama’s appointment of a long-awaited consumer chief and three new members of the National Labor Relations Board.

In the economy, US apartment vacancy rates fell to the lowest level since 2001 due to foreclosures, and people unable or unwilling to buy homes. Tight mortgage lending standards continue to hamper new home sales, which has compelled the Federal Reserve to weigh in on the subject.

The support of housing prices is fundamental to economic recovery, and the Fed would like to see more action from Congress. It is likely that the US economy will not begin to recover in earnest until there is some growth in home values.

In addition, ADP, one of the largest suppliers of payrolls, reported that the US added 325,000 private sector jobs in December, much higher than the 175,000 expected. This marks the third consecutive month of growing job creation, and follows a general trend of improving economic data.

The US Department of Labor followed up on Friday January 6, announcing that non-farm payrolls had increased 200,000 in December (against the expected figure of 155,000) and a downtick in the unemployment rate to 8.5 per cent.

While this sounds like good news, unfortunately the unemployment rate decline continues to be largely attributable to a decline in the labor participation rate, which at 64 per cent has reached a 27-year low. It is hard to see how companies are going to begin to hire new workers in earnest until there is more clarity on taxes, new regulations, healthcare costs and, by extension, the upcoming election.

Looking at the other side of the Atlantic, in Europe there was an agreement in principle to impose an embargo on Iranian oil. While a final decision will not come for a few weeks, further tension in the Middle East will most certainly have an impact on the price of oil. Should the Iranians follow through on their threat to block the Strait of Hormuz, look for a spike in prices.

Most equity indices opened up on the first day of 2012 trading but, in spite of a fair amount of volatility, did not advance over the following days. After a dismal 2011, US banks bucked this trend and generally moved higher.

Looking ahead, it would be prudent to remain cautious on the markets in the near term given the enormous macroeconomic uncertainty in Europe. The US economy has remained resilient in spite of the pressure on the European continent, as evidenced by the euro falling to a 15-month low against the dollar.