After a volatile 2011 (the S&P 500 was flat and global equities were down about 16%), the New Year greeted investors with improving U.S. employment data, along with concerns the European financial system remains fragile. Globally, the financial stability of many businesses seems solid, consumers are a mixed bag and many governments remain under stress. Notably on Thursday, aluminum producer Alcoa said it would cut production by 12% to address declining aluminum prices and manage its costs. As earnings season begins this week, investors will learn about business demand and the impact of a strengthening U.S dollar.
Headlines, actions and debates on monetary and fiscal policy will likely continue to drive the direction of global markets. The continuing deleveraging process within the financial system will likely dampen economic growth in many regions – and limit the performance of risk assets such as equities. The fourth quarter results and forward outlook from business executives, as they report earnings during the coming weeks, will determine the short-term direction of many markets. Expect a cautious tone.