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The Sandy Spring Way

September Observations

September 5th, 2012 | By Beau Mercer

Do you believe in magic in a young girl’s heart?
How the music can free her, whenever it starts
And it’s magic, if the music is groovy
It makes you feel happy like an old time movie
I’ll tell you about magic, and it’ll free your soul
But it’s like trying to tell a stranger about rock and roll.”
—John Sebastian and The Lovin’ Spoonful.

The first documented Olympics games started for different reasons. At that time Greeks were always fighting each other. One of the kings was despondent because his kingdom had epidemics and wars. Because he wanted to help his people he went to Apollo who told him to revive the games which had been abandoned for years. Thus, the king asked for help from the kings of Sparta and Athens and together they formed something that changed the whole history of Olympia — the Olympic truce. A current need for an Olympic truce arises from the lack of civility in the Presidential election. We are dealing with “Obamaloney” and “Romney Hood” and a cult of partisanship. There is no sincere grappling with why a voter should vote for a particular candidate. As Peggy Noonan wrote in the August 11, 2012, issue of the Wall Street Journal,”we are a nation that believes nothing” and (I contend we) are strangers to rock n’ roll.

When I drafted (my) 2012 Financial Astrology in December 2011, I envisioned another tumultuous year in which the European Union, the Republican primaries and the Chinese economy would each have a turn on media’s center stage. Astrology can provide short term glimpses of market volatility and complacency but does a very poor job of predicting the influence of political events. For example, no one could have predicted when Congress established Labor Day as a national holiday that the government could implement policies which would diminish the competitive position of the US in the globalized economy. Every year has its seminal event, such as the debate over balancing the federal budget, which enable commentators to postulate on the role of monetary or fiscal policy. Sometimes we forget that commentators are not investors! The stock market is pressing towards new highs despite disappointing US economic data (particularly unemployment), slowing growth in China and fiscal difficulties in Europe. The stock market is buying current spending power and ignoring future debt loads. Prospectively the political process will produce tax and budget reform but the negotiations promise to be painful. (Can the $250,000 taxable income limit be increased to $500,000 and peace will prevail?)

Astrology cannot be working! Since 1980, the S&P 500 has, on average, declined in the first half of the presidential election years, and then rallied in the second half. Surprisingly, given the state of the domestic economy and global events, 2012 posted the second best first half of any presidential election year dating back to 1980, gaining 8.3%. The first two months of the second half of the year provide evidence that the market may continue to generate returns which baby boomers and retirees badly need at a time of pathetically low interest rates and the specter of inflation down the road: investment returns that can potentially rise over time. Possibly the positive market has determined whom the new President will be and is reacting to his solutions. Over the next few months, both political parties will have the opportunity to present their solutions to often discussed problems. The election results will provide guidance on the possible resolution of so-called ‘intractable’ problems. Maybe we should believe in MAGIC?

—Fred