Quarterly Market Update
Quarterly Capital Markets Review and Outlook
U.S. Economic Outlook
- The Federal Reserve (the Fed) stands ready to exit quantitative easing on October 29 and something of a “buy the rumor, sell the news” activity surrounding the event would not be surprising.
- Early fourth quarter mixed economic data may even leave open the possibility of further purchases by the Fed, in effect, extending QE3. However, this seems unlikely at this point unless we see more extreme deterioration in economic releases for the balance of October.
- Although there is some risk to the upside, job growth for the remainder of the year is unlikely to break out of existing trend lines of 250,000 jobs per month.
- Because the equity market has not had a correction in three years, the possibility of a pullback cannot be ignored, and the longer the bull market runs, the greater the odds become.
- What has moved the equity market forward this year, and what should continue to move it forward, is a good earnings environment. Forward earnings guidance for the balance of 2014 is strong.
- The strengthening U.S. dollar, indicative of the relative strength of the U.S. economy, should drive investment activity to the U.S., offsetting some of the concerns about valuations and strength of the economic recovery.
- The quarter’s pullback in emerging markets offers a bit of value but investors must be selective as some countries are better prepared for rising U.S. interest rates than others, and the asset class remains a space where active management is important.
Fixed Income Outlook
- We remain in the “lower for longer” camp – rates may stay lower, for longer, than investors currently expect. Consensus forecast calls for the yield on the 10-year Treasury to end the year at 2.72%.
- Investors have recently begun to interpret low inflation as indicative of weak growth and a reason for the Fed to keep rates lower for longer. The gains to create expectations that GDP will rise to around 3%, and inflation to north of 2%.
- Corporate bond spreads should remain at relatively tight levels for an extended period of time.
- Municipal bonds will likely remain at their richest level in years, and continue to drift with Treasuries.
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).