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The Sandy Spring Way

February Observations

February 7th, 2013 | By Beau Mercer

Just runnin scared each place we go,
So afraid that he might show
Yeah, runnin scared, what would I do
If he came back and wanted you?”

—Roy Orbison, Runnin Scared

Tyler Cowen of George Mason University reminded all in the February 2, 2013 issue of the New York Times that budget sequestration will start cutting government spending automatically on March 1. Under sequestration money actually appropriated by Congress is sequestered by the Treasury and not handed over to the agencies to which it was originally appropriated. Sequestration can be avoided if Congress and President Obama agree upon a long term deficit reduction plan, the so-called grand bargain. As has been the case for the last two years, the Democrats are unwilling to pay for the deficit reduction package without additional taxes and the Republicans are unwilling to approve sufficient new taxes. Goldman Sachs analyst Alec Phillips thinks the sequester will reduce economic growth a full point in the second and third quarter. Once again the politicians are challenged to focus upon the betterment of the whole rather than special interest. Maybe now is the time to reflect on a comment made by John Kennedy, “Let us not seek the Republican answer or the Democratic answer, but the right answer. Let us not try to fix the blame for the past. Let us accept our own responsibility for the future.”

On several occasions in January, President Obama asked for National Conversation(s) on gun violence, immigration, marriage equality, climate change, obesity, bullying, race and debt-all concerns which need to be hashed out. Does a specific National Conversation have priority over another one? Why are the proposed National Conversations necessary in a society that emphasizes individual freedoms? Thomas Jefferson stated, “I predict future happiness for Americans, if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.”

In keeping with the trend of recent years, the Standard and Poor’s 500-stock index, a measure of the broad market, has climbed more than 5% thru January 30, closing at its highest level since December 2007. Last January, the S&P rose 4.4%-a blistering pace that, if kept up for the rest of 2012, would have translated into a compound annual return of nearly 67%. “As January goes, so does the rest of the year.” There is a nice correlation between a strong January and a strong year for the stock market. Amazingly 36 out of the last 39 times that January has been profitable for stocks, the year ended in positive territory. January 2013 results also validate a December 2012 Barron’s article which cited earnings forecast of 10% earnings growth and numerous analyst forecasts that the bull market will continue in 2013. The US economy is positioned to experience accelerated growth with increased demand and the stabilization of balance sheets.

Recently Barron’s published a super bullish cover story proclaiming that the Dow would pass 15,000 this year. As everyone recognizes, financial magazine covers tend not to be the best indicator of the direction of the markets. Nevertheless, the enthusiasm of the commentary hides the common sense hidden in the bullish argument. Valuation, quantitative easing and available investment income on both corporate and consumer balance sheets signal opportunity. And don’t forget the Super Bowl indicator!