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|
Notes: S&P 500, Gold, DJ-UBS Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT TR Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance, Barron's, djindexes.com, London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
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.
Sean M. Dowling, CFP, EA
President, The Dowling Group Wealth Management
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- The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
- The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices.
- The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
- This newsletter was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.
- Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.
- The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.
- The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.
- Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
- Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
- Past performance does not guarantee future results.
- You cannot invest directly in an index.
- Consult your financial professional before making any investment decision.
http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html (click on U.S. & Intl Recaps and then click on "Fed tops sequestration" under "Simply Economics")
http://online.barrons.com/mdc/public/page/9_3063-economicCalendar.html (click on U.S. & Intl Recaps and then click on "Information overload" under "International Perspective")
http://www.minneapolisfed.org/index.cfm? (in the gray box on the upper right-hand side of the webpage, enter in 1990, $2.00, 2012 to get the answer)
ADV & Investment Objectives:
Please contact The Dowling Group if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth on Part II of Form ADV and is available for your review upon request.
IRS Circular 230 Disclosure:
Pursuant to requirements imposed by the Internal Revenue Service, any tax advice contained in this communication (including any attachments) is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code or promoting, marketing or recommending to another person any tax-related matter. Please contact us if you wish to have formal written advice on this matter.
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