The Canadian stock market incurred a relatively big hit on Friday, falling more than 1% as weakness in the energy, materials and banking sectors combined to wipe out the year-to-date gains the index made this year. Commodity prices fell and bank shares were hit by concerns over a bank fee proposed by U.S. President Barack Obama, as well as by disappointing results from JPMorgan Chase & Co. The proposed fee would see U.S. banks pay up to $117 billion to reimburse taxpayers for the government’s financial bailout of the sector. The big 4th quarter loan losses reported by JPMorgan raised concerns about earnings for the broader U.S. banking sector and the overall economy.

Stock prices have rebounded significantly since posting their recent market lows last March 9th but they are currently assuming that things will continue to go well within this fragile recovery and news of weakness will likely result in some short-term market weakness. Corporate results over the next several weeks will likely drive the direction of equity markets. The price of oil fell for a 5th straight day on Friday, settling at $78 a barrel, while gold prices also dropped.

The Toronto Stock Exchange’s S&P/TSX composite index closed down 119.01 points, or 1.01% at 11,685.37. All 10 of the index’s main sectors fell, with the mining-heavy materials group leading the way. Year-to-date the index is down marginally but things have been volatile as the index did have a brief rally above 12,000 last week, the index ended 2009 at 11,746.11. On the week the index was down 2.24%.

In the United States stocks slid after JPMorgan Chase & Co. announced results, following a poor retail sales report earlier in the week, a weaker-than-expected Reuters/University of Michigan Surveys of Consumers for early January hurt shares as consumer unease grew about incomes and unemployment.

In short, the 1st round of major quarterly earnings reports this week has been mixed, leaving investors uncertain about whether stocks can build on strong gains since March 9, 2009. JPMorgan, the 1st major bank to report quarterly results, announced heavy losses on mortgage and credit card loans, sending its shares down 2.3%. JPMorgan is a bellwether and a very well-managed company making some investors pessimistic about the upcoming results from the U.S. banking sector. Other retail banks like Bank of America and Citigroup will report in the next couple of days and investors will be looking to see if credit conditions are improving including lower loan loss reserves.

The Dow Jones industrial average dropped 0.94%, the Standard & Poor’s 500 Index fell 1.08% and the Nasdaq Composite Index lost 1.24%. For the week, the Dow ended down 0.1%, the S&P fell 0.8% and the Nasdaq fell 1.3%.

Data is showing a recovery from the worst downturn since the 1930s is gaining traction however, consumers remained cautious about the economy’s prospects in the face of stubbornly high unemployment. The Reuters/University of Michigan Surveys of Consumers’ preliminary index of sentiment for January inched up to 72.8, from 72.5 in December. The reading was the highest in 4 months, but it fell short of market expectations. The question remains how this trend will continue and to what degree we can expect it to translate into higher sales, higher consumer spending etc…

While the economic recovery that started in the 3rd quarter of 2009 probably gathered steam in the 4th quarter, there are concerns it could sputter later this year because consumers are not well positioned to take over the spending baton from the government. For more on the economic recovery and the outlook for 2010 please see my monthly commentary — you would have received an e-mail link this past Friday.

Sluggish domestic demand is keeping inflation pressures subdued. That will allow the Fed to continue to hold down short-term interest rates at essentially zero and continue to have an aggressive stimulatory policy. The December consumer inflation report pointed to mute price pressures.

This morning European stocks markets rose modestly as speculation of a pickup in corporate mergers & acquisitions. Wall Street will remain closed for the Martin Luther King public holiday. Investors are speculating International Power will be bought by GDF Suez. Shares in candy maker Cadbury PLC in London were also up on weekend newspaper reports that Kraft Foods Inc. was preparing to sweeten its offer for the British company. Analysts said there are mounting expectations that the amount of mergers and acquisitions taking place will increase over the coming months as the global economy recovers from recession. Commodity prices are also a little higher this morning.

Regards,

Wilfred Vos Bcs, FMA, CIM, CFP, FCSI, DMS, CBV, MBA, CFA

SVP & Partner