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  1. Fundamentally Strong

    The long, smooth, record-setting ride on Wall Street is over. Investor fears about higher interest rates escalated into rapid, computer generated selling Friday and Monday that brought the S&P 500 down almost 8% from its high on January 26. The Chicago Board Options Exchange VIX index measures stock market volatility. Its long term average level is around 20 and it spent most of last year closer to 10. It is now back up over 30. Corrections are marked by a 10% drop in value. Below are some interesting facts to keep in mind: According to Deutsche Bank, the stock market averages a correction about every 357 days, or once a year.  Our last correction was nearly 1,000 days ago, the third longest streak on record. It is this streak that has so many observers believing we are due.  However, you might be curious to know we went 1,800 days without a correction in the mid-1990s. The passage of time alone doesn’t predict a correction. What should matter much more are the fundamentals. And they remain strong. Last Friday we learned that 200,000 jobs were created in January and the official unemployment rate remains at 4.1%. And average hourly wages grew by 2.9% year-over-year, well above the 2.6% economists had expected. Over the past year we have seen a growing body of anecdotal evidence that revealed upward wage pressures in specific geographies and sectors. Now we are seeing that appear in the official, nationwide averages. We are also focusing on the following: Impact of growing revenues…

  2. Fixed Income Market Outlook – 4Q 2017

    Fixed Income Markets From the outside looking in, fixed income markets had a fine year. We enjoyed positive returns, abundant liquidity, and unusually low volatility. While we still expect positive returns in 2018, we see a changing narrative informing our view of what is to come. The fact is that 2017 ended much stronger than it began. After stumbling in the first quarter, GDP is now expected to notch its third consecutive quarter of 3%-plus growth when the fourth quarter is reported, something last seen in 2004-05. Consumer spending is up and manufacturers struggle finding workers to meet a growing demand. Tax reform is expected to provide additional funds for companies to direct towards investment and higher wages. Job growth is still expanding at a pace that will move the unemployment rate down. It would be faster still but for a continuing skills mismatch between hiring companies and the unemployed. And inflation, while still below the 2% target set by the Federal Reserve, will be pressured to higher levels in the coming year. There are also the actions of the Federal Open Market Committee (“FOMC”). They undertook three rate rises in 2017 and are currently forecasting three more for 2018. They also began reducing their balance sheet in October by $10 billion/month and will work their way up to $50 billion/month by the end of 2018. This represents an aggregate $450 billion reduction over 15 months, just a 10% slice from a $4.5 trillion pie. Too slow in our view. Even so, this action alone presents…

  3. Equity Market Outlook – 4Q 2017

    Equity Markets As we entered 2017, we thought conditions were ripe for positive equity returns; something on the order of 8-10%. It turned out substantially better, with all the major U.S. equity indices returning double digits for the first time since 2013, and international indexes doing even better. Our proprietary screening models are revealing more interesting companies from a broad range of sectors. For active managers like us, digging deeper reveals an even better story. As the year progressed and concerns of overvalution grew, we remained bullish. The economy was picking up. Jobs were still being created. Earnings were still strong and growing. And we continued to identify names whose value we felt was not fully reflected in their price. Valuations aren’t cheap, but we still define them as fair. We did witness periodic rotations from sectors that had done well (i.e., semi-conductors and software) to sectors that had lagged (retail and financials). For example, Amazon finished the year up over 50%, beating the S&P by 30%. Yet there were points where Amazon lagged the broader indices by more than 10%. The same thing happened with banks, retailers, semi-conductors and others. The Consumer Discretionary sector was the strongest in Q4, after posting the weakest returns in Q3, and Technology returns were among the strongest, again. Energy and Telecommunications, two sectors struggling with volatile commodity prices and intense competition respectively, were the only sectors to post negative returns for the year, despite turning positive in the second half. The widespread reach of automated trading programs and passive investors contributed to…

  4. Interest Rates – 2018

    Interest Rates – 2018 In 2018, we expect: • Job growth will continue, albeit at a slower pace than before. That growth will exceed new job market entrants, which will continue to put upward pressure on wage growth. • We expect GDP to continue its slow move to a higher sustainable rate into 2018 which will pressure the Fed to consider removing accommodation faster than they would like. • Coupled with inflation readings that will exceed 2%, we see the long end of the yield curve starting to move materially upward along with the short end as the Fed hikes rates 3-4 more times in 2018. To support our outlook, consider the following. In 2017 we saw the Federal Reserve meet its rate changing expectations. Median forecasts for the Federal Funds rate suggested 3-4 rate rises. The Fed has now raised rates three times in 2017. As is usually the case, the 2 year US Treasury Note has been moving upward along with the overnight rate. However, what happens further out on the yield curve could have greater long-term consequences for fixed income investors. Long-term rates are not moving upward in this environment, but are actually moving down, raising concerns over the risk of an inverted yield curve and the downsides that can often follow such occurrences. What is behind this state of affairs? The simplest explanation is to recall that short rates are most sensitive to Fed policy expectations. Short rates can fluctuate wildly based on how markets think the Fed will interpret new…

  5. Christen Dusselier Earns CFP® Designation

    Christen Dusselier, Portfolio Manager at Mitchell Capital Management has earned the prestigious Certified Financial Planner® (CFP®) designation. The CFP® Program, whose predecessor certification was first issued in 1972, is administered by CFP Board. CFP Board, a not-for-profit association, acts in the public interest by fostering professional standards in personal financial planning through setting and enforcing education, examination, experience, ethics and professional conduct requirements. The CFP® marks identify those individuals who have successfully completed financial planning coursework. They have passed the CFP® Certification Examination covering financial planning process, risk management, investments, tax planning and management, retirement and employee benefits, and estate planning. And they have met the rigorous experience and ethical requirements necessary to display the mark. CFP® professionals also agree to meet ongoing continuing education requirements and to uphold the Code of Ethics and Professional Responsibility, Rules of Conduct and Financial Planning Practice Standards. Currently, there are more than 76,000 CFP® professionals certified by CFP Board in the U.S. Encouraging the pursuit of the CFP® Designation helps to broaden the added value our clients receive when they choose to partner with Mitchell Capital. Please join us in congratulating Christen on her achievement. Please click here to view our disclosures.

  6. What can you do for me, Bitcoin?

    Not much, we would argue. History is full of fringe investments that occasionally make the news following a rapid, and oftentimes inexplicable and indefensible, price increase. Bitcoin is only the latest, leaving even casual investors asking “what is it, and should I be buying some?” Bitcoin is an unregulated cryptocurrency created in 2009. A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets. Among the first digital currencies produced, Bitcoin has also become the most well-known. Earlier this year, Abeer ElBahrawy at City University in London, along with some colleagues, examined the cryptocurrency market and found it to be significantly more complex and mature than most had thought. Even if you thought it was already complex. Click here if you want to read for yourself. There have been approximately 1,500 cryptocurrencies introduced since 2009. Many have died since and around 600 are actively traded today. The market value of cryptocurrencies is growing and is estimated at around $300 billion, depending on how Bitcoin trades from day to day, compared to the $60 trillion of money in the world. Bitcoin remains the biggest cryptocurrency, but its lead has been eroded by technological improvements of other competitors. That is one problem with trying to back the right digital currency, there is no barrier to entry for competition. All it takes is a computer and some skill to make an improvement. If that doesn’t…

  7. The Great Correlation Collapse

    As flat as the Kansas prairie. That’s one way to describe a volatility chart for the equity markets in 2017. Seemingly absent from Wall Street this year, volatility indexes are trading near record lows and rarely getting close to long-term averages. Our human nature likes a smooth ride, whether in a car or in our investments. For the former, we can thank good road and suspension engineers, but in the latter it is often less obvious. We should look around a bit more to find out where to direct our appreciation. At the same time that volatility has bottomed, equity indexes have hit dozens of records through the year in a mostly linear way. According to LPL Financial, the S&P 500 recently set a record for how long it has gone without a decline of 3%. As of November 14, it has gone 50 sessions without a drop of 0.5%, a stretch last seen in 1968. And for the year it has experienced only eight sessions where the closing price changed at least 1%, an unusually small number of occurrences. Nothing to see here, please move on. It seems our good fortune comes largely from the collapse in equity market correlations. Correlation refers to the degree to which two different securities, or groups of securities, move in tandem. A correlation of 1.00 means both assets move perfectly in tandem. A correlation of 0.00 means two assets move in completely opposite directions. According to DataTrek, Research, between 2012–2016, average sector correlations were 0.81; last month they…

  8. Global warming

    We lifted the title for this post from Ed Yardeni who runs Yardeni Research, an investment strategy research firm. Ed offers a checkup on an economic theory debate that has been simmering for several years in the economics community, nicely tucked away from the wider world. The crux of the issue is finding an explanation for the frustratingly slow pace of economic recovery coming out of the crisis of 2008. Emerging from the ensuing recession, the U.S. economy was forecasted to grow in the same 3-4% range as in other recoveries. We crossed 3% a quarter here and there, but overall annual growth rates hovered around 2%. Aggressive forecasts were constantly scaled back, but the answers to the shortfalls weren’t obvious. In 2013, Larry Summers, a Harvard professor, gave a speech that suggested the United States was stuck in an extended period of secular stagnation. This is the idea that our economic problems weren’t a product of the business cycle, but are permanent drags on the modern economy. The term was coined by economist Alvin Hansen in 1938 to explain the sluggish recovery throughout the preceeding decade. The core of Hansen’s thesis stated that slower population growth and a lower speed of technological progress would permanently thwart economic growth. World War II helped to change these circumstances, but a long peacetime expansion that followed put the theory on the shelf to gather dust, until now. Kenneth Rogoff, also a professor at Harvard, sits on the other side of the issue, dismissing secular stagnation as a…

  9. What are you afraid of?

    In 2016, Chapman University, a private, non-profit university located in Orange, California, produced its third annual survey of American Fears. The survey asked respondents about 65 fears across a broad range of categories including fears about the government, crime, the environment, the future, technology, health, natural disasters, as well as fears of public speaking, spiders, heights, ghosts and many other personal anxieties. The greatest number of respondents, 61%, report a fear of corruption of government officials. The rest of the top ten are represented between 35% and 41% of respondents. These include becoming victims of a terrorist attack, loss or illness of a loved one, economic/financial collapse and even fear of the Affordable Health Care Act, itself an effort to alleviate the fear of having no health insurance. That’s a lot of fear. The composition of the list also presents another perspective. Just how many of these fears can be addressed; can we do anything about them to mitigate our anxiety? For example, what can we do about corruption of government officials? Arguably, such untrustworthy officials can and should be dealt with at the voting booth. Joseph de Maistre, a French lawyer, diplomat, writer and philosopher who died in 1821 is credited with the quote, “In a democracy people get the leaders they deserve.” How about the fear of becoming a victim of terrorism? We could stay home all day in order to reduce our exposure to the unfathomably small probabilities, but that is hardly practical to help us navigate life successfully. What about the…

  10. Who is Jerome Powell?

    That was a late inning surprise. Yesterday, President Trump announced that Jerome Powell would be his choice to lead the Federal Reserve starting next February. Powell has been a Fed Governor since his nomination in 2012 by President Obama, so he is expected to garner bipartisan support in the Senate. Prior to the leaks that started last week, Powell did not seem to be the front-runner for the job – the highest odds we assigned to his becoming Fed Chair never exceeded 35%. Therefore, comparatively little was written about his past views and actions. As a Governor, he didn’t give a lot of speeches, his wasn’t the loudest voice in the room and he never dissented over 44 meetings. He appeared to be a loyal soldier. Powell would be the first Fed Chair without a PhD in Economics since Paul Volcker in the 1980’s, thus we lack a body of published research from which we can glean his likely outlooks and views. He does bring a respected body of public service and private business experience that should serve him well. Notably, markets will like the appointment for the continuity. What evidence does exist suggests he will maintain the path set by Janet Yellen in raising rates, diminishing the level of assets on the Federal Reserve balance sheet, supporting some level of regulatory rollback and otherwise doing little to upset monetary policy. He is not expected to rock the boat. Click here to see a Bloomberg article that we think does the best job of describing…