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The Sandy Spring Way

October Observations

October 4th, 2013 | By Beau Mercer

FredericBurkeYou’re sweet as a honey bee, but like a honey bee stings, you’ve gone and left my heart in pain, all you left is our favorite song, the one we danced to all night long.”

—”It’s the Same Old Song”, The Four Tops

The Boston Red Sox are a can’t miss or maybe it’s finally time for the Cleveland Indians to win a World Series. Boston has a lineup that can sting any opposing pitcher but Cleveland has Boston’s old manager who remembers the song. The national pastime is stock picking except in October. October is the month in which the annual championship series is played between the American League and National League champions. The American League teams have won 62 of 108 World Series but no one can predict what will happen in the stock market nor can they predict how the government will make our lives better.

The last time the government failed to open was at the end of 1995 and early 1996. The 1995-1996 closure was the result of conflicts between President Bill Clinton and Congress over funding Medicare. The stock market reaction to the 1995 government shutdown was nominal. Seventeen years later, members of Congress AGAIN vow to address the rate of government spending and the continuing expense of certain entitlement programs (Obamacare). The stage is set for the World Series of political fights in which Congress will also be asked to fund the government and to raise the debt ceiling. No one can win this game and the economy and stock market will be affected if the shenanigans persist. The economic effect of the political fights depends on the substance. The markets thirst for a free market that is enabled by government not hindered.

Market analysts project that US companies will increase earnings 5.2% and 3.2% excluding financial firms in 2013. Quantitative easing continues to enhance the returns on equity of those companies requiring subsistence. A protracted government shutdown would be negative for the stock market. Although commentators may disagree, the stock market appears to be trying to ignore the continuing uncertainty created by an amazing array of crises. The market continues to dismiss indecipherable ‘lines in the sand’ such as Syria, gun control, counterterrorism, climate change, arbitrary regulation and immigration. Almost as anticipated (by Warren Buffett), the S&P 500 is up 19% in 2013 and advanced 150% since the start of the bull market in 2009. The US economy is expanding and there are recognized strengths which have yet to be deployed. A government report issued on September 25 indicated that the GDP grew at an annual rate of 2.5% in the second quarter. Spending on durable goods rose 6.2%. Unemployment claims have fallen. There is a concern, however, that government intervention-reactive or proactive- may debilitate the natural course of events.

The 1995 World Series matched the Atlanta Braves against the Cleveland Indians. The Series was Cleveland’s first Series appearance in 41 years and marked the resumption of the Fall Series after the previous year’s Series was cancelled due to a players strike. Precedents exist for disruption in baseball and government. Baseball and our form of government are distinctly American. Mark Twain called it a symbol of ‘the drive and push and rush of the raging, tearing, booming 19th (and 20th) century’. The 2013 Series will be played and hopefully the players in the now too familiar political circus will return to the playing field. We should all be concerned that at some point we will stop paying the price of admission and the game will go away. Tilting at windmills is not costless.

It’s the same old song but with a different meaning since you been gone.”
— The Four Tops

—Fred