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New Year’s Vantage Point

January 15, 2013

In this environment of sluggish growth, we think a number of fixed income sectors still hold some potential for investors.
-Christopher J. Molumphy, chief investment officer, Franklin Templeton

We entered 2012 cautiously optimistic about U.S. economic growth even though the U.S. economy experienced stagnant wage levels and stubborn unemployment levels coupled with struggling residential housing and commercial real estate markets. Given the severe recession, combined with the financial crisis, from which the U.S. has been recovering, expectations for growth both today and going forward continue to be appropriately muted.

As we enter 2013, however, we remain reasonably constructive on the U.S. economy. Overall, the U.S. consumer has made progress in†reducing debt balances, the unemployment rate has continued to decline, corporations have remained healthy, and we think the housing sector has likely bottomed and should continue to improve gradually. However, headwinds do remain. When we look at the U.S. debt situation, it very much concerns us that going into this fourth post-recession year, we simply do not see any credible plan to reduce this deficit on a go-forward basis. While we donít necessarily see this as being an immediate issue, we are very much concerned that the lack of ability to manage a very serious debt problem will negatively impact the markets. Many were closely monitoring the fiscal cliff negotiations for some sign of progress in this area. While Congressional action on January 1 provided a temporary patch and time for further negotiation, a more definitive resolution could still be some time away. In the meantime, much remains unknown about the impact of future fiscal and tax policies on investor sentiment.

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