“It is tedious to tell again tales already plainly told.” – Homer, The Odyssey

The ancient Greeks were great storytellers.  That tradition continues to this day – for better and, unfortunately, for worse – as the world has witnessed over the last several years.  We fear that just as King Odysseus faced obstacles and headwinds throughout his 10 year journey home, the European Union, with Greece currently front and center, may face the same chronological challenge.

Many equity investors may think of their own investment journey through these historic markets in similarly epic terms.  Certainly, significant continuing imbalances in the global economy, doubts about the timing and effectiveness of various policy measures, and lingering after effects of the Great Recession of 2008-2009 have only added to an already tough environment.

We can all weather an occasional rough year. But over the last 12 years, real returns for equities have been essentially nonexistent.  The headlines from the last quarter alone – including the Greek vote to stay in the European Union, Spanish banking stress, the Supreme Court’s health care ruling, the kick-off of the presidential race, various global central bank liquidity maneuvers, the failed Facebook IPO, the Stockton and San Bernardino California bankruptcy filings, the highly-discussed fiscal cliff and even the budding LIBOR rate setting scandal – have only added to a sense of investment fatigue for many individuals. It’s easy to understand the temptation to throw in the towel.

Investors are tired and we don’t blame them.  As the graph on the next page highlights, even television ratings for the popular financial news network CNBC have fallen to seven year lows, possibly signaling a “tuning out” by mainstream America.  The deafening news flow is leading individuals to either disengage or conversely, to become highly emotional – or a little of both.  Our reaction is different: Sand Hill is focused on the unique opportunities and risks that we face in the here and now.   Yes, it takes vigilance and discipline to stay focused – even Odysseus had to navigate the seemingly endless choppy waters to reach his goal. But our ability to anticipate, evaluate, and react appropriately in an ever-changing world economy is at the core of what we do every day.

Contributing heavily to the ongoing fears, not to mention fueling the 24-hour news machine, were the suspenseful six weeks from the first Greek elections on May 6th until the European Summit on June 30th.  That period of uncertainty appears to have been enough to materially impact economic activity and corporate results during the second quarter. As a result, for the third year in a row, we are facing another economic soft patch.  This particular mid-year slowdown is reminiscent of the past two years, but with two important differences.  First, the growth disappointment this year is prevalent in both developed and emerging economies.  And second, growth has weakened from a lower absolute starting point than in the prior two years.

On the upside, European leaders did make some progress in tackling their debt crisis when they met in Brussels late in June.  Given that prior meetings ended with disappointing results, global investors were positively surprised that: i) rescue funding would be made available to help Spain’s fragile banking system and to buy Italian sovereign bonds; ii) the European Central Bank would move forward with a plan to oversee Eurozone banks; and iii) €120bn of funding (1% of Europe’s GDP) would be made available to stimulate economic growth within the region.

We continue to take the cynical view that the European Union is like a troubled marriage that was entered into hastily and is now terrifyingly expensive to dissolve.  Recently, a German official predicted the break-up of the Euro would result in a 25% decrease in the size of their economy.  Given the costs of divorce are so severe, some form of reconciliation is highly likely, and remains our base case.

We can envisage five reconciliation outcomes: first, a happy marriage, on Germany’s terms, albeit after a painful period of adjustment for the weak member countries; second, a miserable marriage, which endures because a break-up is too costly; third, a degree of mutual accommodation, in which the north becomes more southern European and the south more northern European; fourth, a partial break-up, with the remaining members moving into one of the three prior categories; and finally, a total break-up.  One way or the other, resolution to the European crisis, as fatigued as everyone is with the story line, is likely to be a multi-year work-out.

In light of the progress in Europe as well as the elevated probability that Washington will reach a compromise and extend the year-end fiscal cliff, we have concluded that the second quarter of 2012 will likely mark the bottom in economic activity this year.  We are forecasting that growth in the second half of the year will actually accelerate modestly, despite the current negativity, not just because of the aforementioned positive political trends, but also due to traditional indicators around interest rates, lower commodity prices, mortgage refinancing trends, and moderating inflation levels.  It will not necessarily be a smooth ride, but valuation levels, particularly for high quality, larger dividend-paying equities are attractive in the here and now.  High quality bonds and alternatives continue to play an important role in moderating the volatility of that bumpy ride.

Sand Hill’s response to the global investment environment, as well as the volatile nature of the economic recovery, has been to take a tactical approach.  We’re using market pullbacks to opportunistically add growth exposure into portfolios, and then trimming our exposures when the world responds too optimistically relative to the supporting economic environment.  Our well-diversified and balanced portfolios are deliberately implemented to anticipate volatility along the way as well as deliver solid risk-adjusted returns over time, all the while providing a modest yield to compensate for the patience that is always needed – and frequently tested in a moment of fatigue – to achieve your total return objectives.

As for Odysseus, he was smart enough to evade the Siren’s song luring him off course – and to certain despair – on his journey home.  He stayed on track by using his wits, staying determined, and being patient.  Your Sand Hill team is equally determined, patient and focused on keeping you on course and away from the rocky shores. After all, your long-term financial plan is your reliable map for the journey home.