Welcome to the official Sandy Spring Bank Blog! To visit our main web site, visit www.SandySpringBank.com

The Sandy Spring Way

February Observations

February 2nd, 2012 | By Beau Mercer

HOW CAN I BE SURE IN A WORLD THAT IS CONSTANTLY CHANGING…HOW CAN I BE SURE…I’M SURE WITH YOU. (The Rascals)

When will you be sure it is safe to invest? Understanding the risk of investment tends to take a second place to fear and/or greed. Does the traditional 401(k) participant understand the risk of his or her investment selection? When do the animal spirits overwhelm the perception of risk? Risk is relative to the individual who has investable funds and can be quite volatile depending on numerous influential factors. For example, the stock market returns through January are up 4.9%, which exceeds the 4.6% return of the S&P 500 and the 4.1% return on the Dow Jones Industrial Average Risk in 2011.

January is typically a good month for large capitalization stocks but that does not explain the market gains. The market did this well last year in January and February so there is a bit of a déjà vu feel to the start of the year. But maybe 2012 is different from 2011! A Bank of America poll of global fund managers showed that elite group to be the most upbeat about U.S. stocks since April 2010. Did these managers envision “depressed value” in Hewlett Packard down 38%, Avon Products down 38%, or American Airlines, which went bankrupt? Or are global managers listening to JPMorgan Chase CEO Jamie Dimon who said, “Demand is everywhere, industrial, consumer, Asia, Latin America, trade finance, corporations, all types of corporations.”

Reality is a foreign concept to risk! With a crisis premium baked into the equity market, reality suggests that stocks as an asset class should be the preferred investment. The worst may be over. During 2011, despite an incredibly volatile economic environment, the S&P 500 operating earnings will likely grow 12-13%; the 2012 story may be the equity market recognizing the recovery. The U.S. economy is recovering, with a GDP forecast of about 3%, resulting from business confidence levels and expansion plans. The Case-Shiller survey suggests that the housing markets may be bottoming (at an extremely low level), with inventories continuing to fall, record low mortgage rates, and rising rents.

The second half of 2011 contradicted reality. U.S. Treasuries rallied after the Standard & Poor’s downgrade. Beginning in August the equity markets also rallied. Normally a rally in the Treasury market implies that investors are “risk off” — meaning that fear of an economic crisis causes investors to seek safe havens. Conversely, a stock market rally is perceived as a “risk on” mode –meaning an investor is safe to invest in the stock market again. Ironically, in the 2011 fourth quarter there was a rally of both the risk on and risk off markets. The risk off and risk on rallies have continued through the first month of 2012, but that anomaly will cease as investors tire of negative returns from their risk off investments.

Real returns can win again. Real returns can find traction in improving durable goods orders, better jobless claims, improved readings of the Conference Board Consumer Confidence Index, and better auto sales. The earnings season tends to tell us THE SUN WILL COME OUT TOMORROW, BET YOUR BOTTOM DOLLAR THE SUN WILL COME OUT TOMORROW.

—Fred