Quarterly Market Update
Quarterly Capital Markets Review and Outlook
U.S. Economic Outlook
- The Fed focus will continue but the market is well prepared for the inevitable “tapering” and September’s pullback likely prepared the market even more so.
- The effect of this year’s sequester was perhaps overdramatized and many of the expectations for its ability to spook the market did not come to fruition.
- Ultimately the current debt ceiling and budget wrangling should create buying opportunities much like in 2011.
- Regardless of the specific rationale, the resulting impact of the Fed’s decision to delay tapering of fixed income purchases appears to have heightened investor interest in maintaining the “risk on” trade.
- We have seen a gradual increase in the price/earnings (P/E) multiples of the major market indices and forward P/E ratios are beginning to be more in line with the 10-year median ratios.
- We continue to believe that economic tailwinds will continue to outweigh headwinds.
Fixed Income Outlook
- We anticipate that the Washington crisis will be resolved which will eliminate a fair amount of the fear and flight rally that has hurt equities and helped U.S. Treasuries and bonds in general over the last few weeks of the quarter.
- The longer-term outlook for bonds is tepid at best as the Fed confronts the challenge of unwinding unprecedented levels of bond buying.
- The so-called Medicare Surtax which excludes tax-exempt investment income should continue to support demand for municipals relative to other fixed income investments.
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).