We at Mitchell Capital Management are rather agnostic when it comes to politicians and their insatiable craving for media attention. So with full warning and advance apologies we begin the discussion on markets and the U.S. economy in light of our politically charged times.

During the third quarter, interest rates recovered slightly from their lows post-Brexit, oil prices stabilized in the $43 to $48 per barrel range, the equity markets bounced around their all-time highs, and U.S. economic growth continued to be anemic.

One of the presidential candidates has accused the Federal Reserve of being politically influenced to maintain artificially low interest rates to keep markets pumped up and to benefit the current administration. The statement is dripping with political innuendo, but does it have a factual basis? Our thought is that the Fed has kept rates at zero for too long, but that the markets are not necessarily doomed once rates rise.

Equity markets, in this zero rate environment and low growth economy, have been led by large capitalization, high dividend paying stocks in the utility and telecommunications sectors. They will struggle when interest rates begin to normalize higher and the economy improves. Market leadership will be replaced with companies that grow their earnings. We believe that companies in the technology, industrial and financial sectors are going to be the growth engines post elections.

Our optimistic view of the equity markets is based on our forecast that the earnings recession of the last five quarters has run its course and is in the midst of turning into an earnings recovery. Please reference the chart, which depicts the earnings per share of the S&P 500. You will see that earnings topped out at $113 per share in September, 2014 and bottomed at $106 per share in April, 2016. Market analysts are forecasting, and we concur, that S&P 500 earnings will rise to $124 earnings per share over the next twelve months as depicted in the red section of the adjacent graph.

The earnings recession was greatly influenced by the dramatic decline in energy prices from July, 2014 through February, 2016. Energy companies’ earnings have come under immense pressure, causing them to slash their capital spending budgets. The outlook has brightened during the summer as crude oil prices stabilized in the mid $40s and it now appears that OPEC is nearing an agreement to cut production for the first time in eight years, which should edge the trading range higher and, most importantly, allow energy companies to grow their earnings.

The financial sector of the market has struggled under the weight of Dodd-Frank regulations, stress tests, micromanagement from three separate national regulatory bodies, and extraordinarily low interest rates. We are expecting the financial sector to outperform over the next twelve months as the regulatory environment moderates and interest rates begin their gradual rise.

Infrastructure and technology spending are two areas of emphasis in each presidential candidates’ platform. Agreeing to rebuild the nation’s roadways, airports, and other transportation networks will directly benefit the industrial and materials sectors while supporting job growth and consumer spending. Technology companies will benefit as government entities and corporations strive to increase productivity and cut costs by applying the latest technological innovations.

Regardless of which candidate wins in November, they will strive to increase economic growth in the US, lest they become a one-term president. The next chart illustrates the gloomy U.S. economic growth environment since the third quarter of 2014. In particular, the last three quarters have been very disappointing. We expect economic growth of 2.5% in the third quarter of 2016 which is a substantial jump over the first half of the year. There is good anecdotal evidence of strong consumer spending, better than expected data on business fixed investment and a healthy rise in inventory buildups.

This brings us to the final question. No, it is not who is going to win the election, but rather when will the Federal Reserve begin to normalize/raise interest rates. We believe that they will raise the overnight rate by .25% at their December meeting and emphasize that the path to ‘normal’ will be gradual. The September meeting was evidently rather lively, since three regional bank presidents, including Kansas City’s own Esther George, actually dissented from the committee’s decision to not raise rates. Three dissenters is a lot. By our own count, at least eight of the seventeen members of the FOMC wanted to raise rates in September.

Janet Yellen had a tense Congressional hearing late in September, as she was grilled over the political appearances of a $2,700 contribution to one of the presidential candidates by a Federal Reserve Governor, Lael Brainard,. Ms. Brainard is also a leading candidate to replace Jack Lew as Secretary of Treasury if Hillary Clinton wins the election. Few accusations make the Fed bristle more than being accused of being politically influenced. While Ms. Brainard’s contribution is legally allowable, it does provide grist for the political mill.

A more scholarly approach to analyzing/forecasting the Fed’s actions is to review each committee member’s view on current monetary policy to see where divisions lie. First, the areas of general agreement; all committee members believe that U.S. economic growth has been subpar and would like to see acceleration back above 2.5% and the overwhelming majority of committee members are pleased with the pace of job creation and the 4.9% unemployment rate. The primary division between the participants is regarding their outlook on inflation. The Fed has set a goal of 2% inflation, a goal they have undershot for the past four years. We believe that a mighty minority at the Fed forecast that the 2% inflation target will be reached in the next few years, and a majority forecast reaching the goal in the next few quarters. Our internal research indicates that the inflation goal will be reached in the Spring of 2017.