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The Sandy Spring Way

October Observations

October 11th, 2012 | By Beau Mercer

“For this is my quest, to follow that star, no matter how hopeless, no matter how far, to fight for the right, without question or pause, to be willing to march into hell for a heavenly cause..’’

– The Impossible Dream from Man from LaMancha.

When Columbus sailed out of the Spanish port of Palos, his impossible dream was to sail west until he reached Asia where the riches of gold, pearls and spice awaited. The trip was long and in order to mollify his crew’s apprehensions, Columbus kept two sets of logs: one showing the real distance traveled each day and one showing the lesser distance. The first log was kept secret. The latter log quieted the crew’s anxiety by under-reporting the true distance they had traveled from their homeland. The deception had only a temporary effect: by October 10 the crew’s apprehension had increased to the point of near mutiny. Sizeable portions of the American electorate, the crew, wonder which log President Obama and Governor Romney are keeping. Juxtaposition the time to October 3, 2012, a member of crew stands up and states,”Mr. President, you’re entitled to your own airplane and to your own house, but not to your own facts”.  And then America was discovered and unemployment suddenly seemed a plausible result of the financial catastrophe of 2007 and 2008 or did it?

Wealth management is a discovery process that focuses on all areas of a client’s financial life and at times such as these can be challenging. The seas are choppy, creating a sense of no confidence. The client, a member of the crew, has gone from a positive asset allocation “America” in the ten years ended last summer to an asset allocation that resembles “Greece”. The election, anemic economic growth, big tax increases and the continuing debt crisis in Europe all tend to neutralize the value of mapping recommendations. These are uncertain times-there’s no doubt about it- but they were uncertain in 1492.

The stock market has performed quite nicely in 2012.  In the three months through September, the average diversified US stock mutual fund returned 5.3%, bringing year to date gains solidly into double digit territory at 12.9%. Most bond funds continued to plod along. The intermediate investment grade bond fund, the most widely held type of debt fund, returned an average of 2.5%, in the third quarter, for a 6.1% return year to date, according to Lipper.

In late September the Federal Reserve Board launched a third round of quantitative easing 3 (QE3) with the stated goal of bolstering economic growth and increasing employment. Provided inflation or a global crisis does not arise, QE3 should expedite the improvement in housing and auto sales. QE3 should also raise prices of dividend paying stocks. Also, the trade weighted value of the US dollar (adjusted for inflation) is near a 40-year low which helps the competitiveness of US manufacturing and services. WE CAN SEE LAND BUT NEED TO AVOID THE SEAWEED OF THE ELECTION!

The election is about five weeks away. These are uncertain times and no one can find solace. As demonstrated daily by the dialogue accompanying the political campaigns, there is minimal consensus on how the economy really works; what the world will look like in five or ten years; and how things will be fixed if problems arise. Probably the only known result of the lack of consensus is what will happen should the automatic budget cuts take place on January 1. Without Congressional action, the estate tax would apply to more than 10 times as many households than in 2012, the payroll tax would expire and millions of additional taxpayers would begin paying the alternative minimum tax. Can it be that the average tax increase across 90% of all US households would be $3,500 according to the Tax Policy Center? Who is going to get me off this ship?

“When written in Chinese, the word “crisis” is composed of two characters. One represents danger and the other represents opportunity”.

– John Kennedy.

—Fred