March 5, 2013

Effects of Italy's Political Uncertainty

It was a bumpy week for stock markets. Early on, markets in many countries were negatively affected by the outcome of Italian elections. Italy's anti-establishment Five-Star Movement, led by comedian Beppe Grillo, won about one-fourth of the votes in both the country's upper and lower houses. Markets lost value as investors anticipated political gridlock could delay Italian economic reforms. Since Italy is the third largest economy in Eurozone and its public debt is significantly higher than its Gross Domestic Product, political stalemate in Italy could negatively affect the Eurozone.

As the week progressed, events in Italy were eclipsed. Ben Bernanke reiterated the U.S. Federal Reserve's intention to keep monetary policy loose until unemployment levels drop. This helped stock markets recover some lost ground. Positive economic news, including higher pending home sales and a rise in consumer sentiment helped push the Dow Jones Industrials, NASDAQ, and Standard & Poor's 500 Indices even higher, and they finished the week in positive territory.

Concerns about Italian election results affected bond markets, too, pushing yields on 10-year Treasuries lower during the week. Lower yields were also driven by uncertainty about the potential impact of sequestration - $85 billion in automatic spending cuts - on America's economic growth.

Despite great political hullaballoo, no action was taken to prevent or modify the spending cuts and they took effect on Friday, March 1. Over the next decade, sequestration is expected to cut government spending by about $1.5 trillion. The cuts will reduce defense discretionary spending, including weapons purchases, base operations, construction work, and more. Cuts also will shrink mandatory and discretionary domestic spending. Two of the domestic programs affected are the unemployment trust fund and Medicare (specifically, Medicare's provider payments).

Data as of 3/1/13	1-Week	Y-T-D	1-Year	3-Year	5-Year	10-Year
Standard & Poor's 500 (Domestic Stocks)	0.2%	6.5%	10.5%	10.8%	2.7%	6.2%
10-year Treasury Note (Yield Only)	21.9	N/A	2.0	3.6	3.5	3.7
Gold (per ounce)	0.4	-6.6	-7.7	12.4	9.9	16.4
DJ-UBS Commodity Index	-0.7	-2.4	-8.6	0.7	-9.0	1.1
DJ Equity All REIT TR Index	0.2	5.3	18.8	19.8	7.5	12.5

The National Retirement Risk Index (NRRI) measures whether Americans will be able to maintain the same standard of living they enjoy today after they retire. When it was updated for 2012, the index showed the number of "at risk" households had increased by nine percentage points - from 44 percent to 53 percent - between 2007 and 2010. In its explanatory comments the Center for Retirement Research at Boston College (the group that compiles the index) attributed the change to the combined effects of the financial crisis, poor investment returns, low interest rates, and the continuing rise in Social Security's full retirement age.

Americans are not unaware of the situation. The 2012 Retirement Confidence Survey found almost one-half of working Americans are 'not too' or 'not at all' confident they'll have enough money to live comfortably throughout retirement. If you fall into either of these categories - and even if you don't - it's important to evaluate your current retirement plan in light of key risks that may influence its effectiveness. These include:

• Longevity risk. A recent headline suggested that 72 is the new 30. The scientists who made the determination meant that modern man, at age 72, has the same chance of dying as primitive man did at age 30. That makes longevity risk - the chance you'll outlive your savings - an essential consideration when planning for retirement. One way to address longevity risk is by developing a retirement income plan that will allow you to generate income for as many years as you may need it.
• Inflation risk is the chance your savings and investment will grow more slowly than inflation, reducing your purchasing power. For example, a gallon of milk that cost about $2.00 in 1990 would have set you back $3.50 in 2012 - and that was after a period of relatively low inflation. One way to address inflation risk is to consider investing in a well-allocated and well-diversified portfolio that may have the potential to outperform inflation over time.

If you have any questions about saving for retirement, or would like to review your retirement plan, please give us a call.

Weekly Focus - Think About It

When planning for a year, plant corn. When planning for a decade, plant trees. When planning for life, train and educate people.

—Chinese proverb

Best regards,
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management

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