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Quarterly Market Update

Quarterly Capital Markets Review and Outlook

U.S. Economic Outlook

  • Second quarter results went a long way towards restoring credence to the U.S. economic expansion after first quarter GDP growth was revised to -2.9%.
  • Improving job market conditions including psychologically important milestones – recouping the 8.7 million jobs lost during the Great Recession and knocking on the door of monthly job increases of 300,000 – support our stronger growth outlook.
  • Stronger than anticipated improvements in the economy could accelerate the Fed’s timing of the first increase in the federal funds rate to first or second quarter, 2015.

Equity Outlook

  • Emerging market equities have the greatest upside surprise potential as expectations for this area are overly depressed.
  • Even if European equity markets respond only modestly to their central bank’s monetary intervention, the potential for improved returns in the Eurozone markets is greatly enhanced.
  • Significant underperformance relative to the large-cap space has helped to ease some concerns over lofty valuations in the small-cap space, and may set the stage for improved performance for the remainder of the year.
  • Large cap, quality companies should do well as these companies are in great shape financially, and higher quality increases in significance as the Fed becomes less accommodative and moves into normalizing interest rates.

Fixed Income Outlook

  • Supply/demand factors will continue to favor municipal bonds.
  • Corporate bond spreads should remain tight unless there is a sector rotation out of corporates, or a credit event widens spreads in general.
  • On the heels of disappointing first-quarter GDP growth and the situation in Iraq, we expect the 10-year U.S. Treasury yield to drift up to 3.0% by year end and progressively move higher, especially after the Fed begins to raise the federal funds rate sometime in 2015.
  • As yields move progressively higher, we anticipate that the yield curve will exhibit what is termed a bear flattener whereby the entire curve rises, but short-to-intermediate rates rise faster than long-term rates given that the former is largely controlled by the level of the fed funds rate while the latter is mostly impacted by the expected inflation rate.

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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).