“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies”- Groucho Marx (October 2, 1890 – August 19, 1977) American comedian and filmed star famed as a master of wit
We selected the quote above for this month’s commentary because much of the recent market volatility can be attributed to world political leaders creating an environment of confusion and uncertainty. The financial markets don’t like uncertainty, especially when it relates to budget deficits, debt levels, credit ratings and future tax policy.
PLANNING COMMENTARY
Amongst all of the recent excitement surrounding Europe, it has nearly been forgotten that the U.S. budget super committee, designated by the President and Congress, will face their deadline this month for issuing certain budget cuts. By law, the committee has until November 23rd to recommend $1.5 trillion in deficit reduction that can be spread over the next 10 years (unless they pass a resolution to extend their deadline). How to do this, not whether to do it, will likely continue to be the center of contention. The options to create the reductions are simple – raise taxes, cut spending or use a combination of the two. However, finding agreement about those options won’t be easy.
The very fact that a law was enacted that formed a committee (made up of six Democrat members and six Republican members) to decide on budget cuts is somewhat amazing in and of itself. To ensure progress would be made, the legislation even mandated an initial meeting be held by September 16. Ten, five, even two years ago, getting tough with overspending and fiscal recklessness was unheard of. Now the discussion is finally taking place and there is plenty of trouble to be found in our fiscal house.
Our hope and belief that cooler political heads will eventually prevail leads us to believe that retirees of a certain age will continue to receive the majority of their promised Social Security benefits throughout their retirement. Likewise, if our leaders make appropriate and timely decisions, Medicare could also remain largely intact for current retirees and those who are very close to retirement (which we typically think of as those currently age 55 and older). Diagnosing the problems correctly and applying the correct remedies will be painful. Future generations may have a much harder set of economics than generations of the past. Yet, by dealing with these issues now we can avert much greater challenges (we can learn from the struggles in Greece and avoid a similar fate). We’re hoping that those in Washington can prove Groucho wrong this time around by being leaders – not politicians.
INVESTMENT COMMENTARY
Well, the S&P 500’s streak of five consecutive down months ended in October. This broad stock index lost 16.3% of its value from May through September. The last time it fell for six consecutive months or longer was 37 years ago in 1974. On October 3rd the S&P 500 turned on a dime and finished the final 20 trading days of the month up 14%. Stronger than expected economic reports during October coupled with the announcement that 3rd quarter GDP came in at 2.5% fueled the rise in stock prices. Adding to the rally was news that European leaders had agreed on a deal that they believed would be a turning point in their two-year debt crisis. Banks had agreed to take bigger losses on Greek debt and to boost their capital levels, while the European Union increased the size of its bailout fund. Global stock markets surged after the plan was unveiled. Now, those gains seem to be fleeting.
Financial Market Indices as of October 31, 2011 | October 2011 | Last 3 Months | Year to Date | Last 12 Months |
S&P 500 Total Return (US Stocks) | 10.9% | - 2.5% | 1.3% | 8.1% |
MSCI Developed EAFE (foreign stocks) | 9.6% | - 9.7% | - 6.4% | - 3.6% |
MSCI Emerging Mkt. Equities (emerging country stocks) | 13.1% | - 12.5% | - 13.5% | - 9.6% |
Barclays Capital Aggregate Bond – Intermediate Term | 0.2% | 1.3% | 5.2% | 3.7% |
Barclays Capital Municipal Bond Index | - 0.4% | 2.4% | 8.0% | 3.8% |
The Greek Prime Minister, George Papandreou, announced unexpectedly Monday that he would put the European rescue plan to a popular vote. This took the world financial markets by complete surprise – not to mention the Eurozone nations that worked very hard last week to craft a bailout plan for Greece. It essentially brings all the concerns about European debt back to the front burner. International creditors have demanded that Greece enact painful tax increases and drastic cuts in public welfare programs, and Greeks have shown their hostility to those measures in violent protests and strikes. If the European rescue plan falls through and Greece defaults on its debt, the ripple effect could be global. It would likely push the rest of Europe into recession, hurting a major market for U.S. and emerging country exports, and banks could sharply restrict lending. Once again the stock market is expressing disgust with Greek politics – telling Papandreou this is the wrong remedy.
EMPLOYEE ANNOUNCEMENTS
We are pleased to announce that Katie Schnur has joined our wealth planning team as a Paraplanner. Katie is originally from Newburgh, IN and is a graduate of Memorial High School. In 2010 she received her Bachelor of Science degree in Financial Counseling and Planning from Purdue University. Her studies included retirement planning, insurance, tax law, estate planning and investments. In her free time Katie enjoys scrapbooking, sewing, watching movies, and spending time with friends and family. Katie is a huge Purdue sports fan and still tries to attend football and basketball games every year.
Perry Moore attended Pinnacle Equity Solutions Annual Conference for Business Exit Planners from October 5th to 7th. The conference provided a networking opportunity with industry leading experts and further advanced Perry’s knowledge and skills in helping business owners strategically plan for the succession of their business.
