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Market Commentary – June 9, 2011

Executive Summary

J.P Morgan – “The Debt Issue”

In the attached article entitled “The Debt Issue”, Dr. David Kelly, Chief Market Strategist of the J.P. Morgan Funds, addresses concerns about U.S. federal budget and discusses the investment implications of several proposed solutions.

In the piece, he describes the current state of the federal finances, discusses three proposed solutions – the deficit commission proposal, the Ryan proposal, and the President’s proposal, and points to five areas that must be addressed – the deficit, tax reform, Medicare and Medicaid, Social Security, and defense spending. He then outlines the most likely scenario and discusses the investment implications of that scenario.

“while debt-related financial turmoil is possible, the most likely scenario is one in which Washington cuts spending and raises taxes enough to avoid a crisis but not so much as to stall economic growth or prevent an increase in market interest rates.”

Kelly cites the following implications for the average investor:

  • Expect to see significant progress toward a deficit/GDP ratio reduction to 3-4% by 2015 and don’t bet on a financial crisis in the U.S. in the next few years
  • If Obama is re-elected, expect higher taxes for upper-income individuals and on dividends and capital gains
  • Expect higher interest rates in economic recovery
  • Expect budget cuts, especially in Medicare and Social Security

Also included are sidebar discussions of the debt ceiling issue and the implications of the end of the second round of quantitative easing, or “QE2”.

In sum, he concludes:

“The bottom line is that while some look at the federal budget as a mortal threat and use it as a reason not to invest, the more likely outcome is that it will be fixed – but fixed at the expense of those who are richer than average, older than average and who are invested in long-term bonds. This being the case, the appropriate response to the debt issue is not to panic, but rather to ensure that your portfolio is large enough and protected as much as possible from both higher taxes and higher interest rates.”

Prepared by:

Suehyun Kim, Investment Research Director
Research Department, Cetera Financial Group


The views are those of Suehyun Kim, Investment Research Director, Research Department, Cetera Financial Group, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors cannot invest directly in indices. Please consult your financial advisor for more information.

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