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Quarterly Market Update

Quarterly Capital Markets Review and Outlook

U.S. Economic Outlook

  • U.S. interest rates should increase in 2015 as both GDP and employment are trending up, and oil prices on balance are more of a positive than a negative for the main street America.
  • The impact of the Fed raising interest rates should be offset to some extent by accommodative monetary policies of Japan and the Eurozone.
  • Low interest rates and affordability will be the reasons for further gains in the housing market.

Equity Outlook

  • Based on expectations for an improving U.S. economy, we are maintaining our current focus on large cap U.S. equities, but are mindful of the tremendous investor flows into that category.
  • Although small cap stocks are not cheap, trading at a forward price-to-earnings ratio (P/E) of 29, the asset class is poised to do well given its dominant exposure to the strengthening U.S. economy.
  • We maintain our exposure to international equities for their diversification benefit as well as for our expectation that the ECB will be successful in its efforts to develop and execute an asset purchase program to satisfy markets and jumpstart the Eurozone economy.

Fixed Income Outlook

  • The outlook for yields in 2015 is divided into two camps – those who believe rates will increase based on stronger domestic economic and employment growth, and those who believe tepid growth overseas will impede Fed tightening. The consensus of the former calls for the yield on the 10-Year U.S. Treasury Note to end 2015 near 2.75%, up from 2.17% at the end of 2014.
  • If U.S. rates rise as expected, the U.S. will have among the highest yields in the developed world which will keep the U.S. dollar strong.
  • Without the Fed’s sponsorship in 2015 by way of quantitative easing purchases, we do not expect mortgage-backed securities to do as well as in 2015.
  • As the U.S. economy continues to improve, we do not expect any big changes in investment- grade corporate bond credit spreads.
  • The 2014 dearth of municipal bond supply should reverse in 2015 driven by pent up demand for capital infrastructure projects that have been on hold since 2008. As state and local budgets improve, municipalities will be more willing to take on projects and issue debt.

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BBVA Compass is the trade name for Compass Bank, which is a member of the BBVA Group. Securities products are NOT deposits, are NOT FDIC insured, and are NOT bank guaranteed. May LOSE value, are NOT insured by any federal government agency.

This material contains forward looking statements and projections. There are no guarantees that these results will be achieved.

Investing involves risk including the potential loss of principal. There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy, such as asset allocation, can guarantee a profit or protect against loss in periods of declining values. Past performance is no guarantee of future results. Please note that individual situations can vary. Therefore, the information presented here should only be relied upon when coordinated with individual professional advice.

Indexes are unmanaged and investors are not able to invest directly into any index.

International investing involves special risks not present with U.S. investments due to factors such as increased volatility, currency fluctuation, and differences in auditing and other financial standards. These risks can be accentuated in emerging markets.

Investments in stocks of small companies involve additional risks. Smaller companies typically have a higher risk of failure, and are not as well established as larger blue-chip companies. Historically, smaller-company stocks have experienced a greater degree of market volatility than the overall market average.

Equity investments tend to be volatile and do not involve the guarantees associated with holding a bond to maturity.

In general, the bond market is volatile as prices rise when interest rates fall and vice versa. This effect is usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.

Fixed income investments are subject to various risks including changes in interest rates, credit quality, inflation risk, market valuations, prepayments, corporate events, tax ramifications and other factors.

The investor should note that vehicles that invest in lower-rated debt securities (commonly referred to as junk bonds) involve additional risks because of the lower credit quality of the securities in the portfolio. The investor should be aware of the possible higher level of volatility, and increased risk of default.

Municipal bond offerings are subject to availability and change in price. If sold prior to maturity, municipal bonds may be subject to market and interest risk. An issuer may default on payment of the principal or interest of a bond. Bond values will decline as interest rates rise. Depending upon the municipal bond offered, alternative minimum tax and state/local taxes could apply.

The price of commodities is subject to substantial price fluctuations of short periods of time and may be affected by unpredictable international monetary and political policies. The market for commodities is widely unregulated and concentrated investing may lead to higher price volatility.

Investments in real estate have various risks including possible lack of liquidity and devaluation based on adverse economic and regulatory changes.

Other Sources: Bloomberg; California.gov; Russell.com; First page index returns are calculated on a total return basis using the following indexes: S&P 500 (SPX), MSCI World (MXWO), MSCI Emerging Markets (MXEF), Bloomberg 7-10 Year U.S. Treasury Index (USG4TR), Morningstar U.S. Agency Bond TR Index (MSBIUATR), Municipal Bond Buyer 40 Index (BBMIRNEW), Credit Suisse High Yield Index (CSHY), MSCI U.S. REIT Index (RMZ Index).