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BBVA Compass

Quarterly Market Update

Quarterly Capital Markets Review and Outlook

U.S. Economic Outlook

  • The U.S. fiscal outlook is positive and less drag is expected due to a reduction in both the federal deficit and budgetary squabbles.
  • The first rate hike in the Federal Funds Rate Target could come by mid-2015 rather than late-2015 as previously anticipated.
  • In 2014, risks to U.S. growth remain biased to the upside, and the focus for domestic markets should return to fundamentals as Fed monetary policy normalizes.

Equity Outlook

  • Last year’s stock market advance was predicated on multiple expansion, but 2014 performance should be driven by corporate earnings.
  • Although price-to-earnings ratios have risen resulting in a more fully valued market, equities have room to move up should earnings come through.
  • Particularly large revenue growth numbers will not be necessary to impact bottom lines and, although modest, the U.S. economy is growing at a sufficient pace to keep corporate earnings rising.
  • After a relatively quiet 2013, higher market volatility experienced in the first quarter should continue through the balance of 2014 as little risk is currently priced into equities.
  • International stocks could be 2014’s dark horse, first quarter performance notwithstanding, as valuations are attractive and investors are looking for a better value.

Fixed Income Outlook

  • Short supply in the municipal bond market could very well temper the pace of rising tax-exempt yields.
  • Corporate bonds are also facing similar supply constraints that have plagued the municipal market. Credit spreads should remain tight.
  • Monthly payroll gains in the “sweet spot” of 200,000 to 240,000 for the remainder of the year appear ideal in order to keep interest rates in their current band while preventing equity investors from worrying about more aggressive monetary tightening.
  • Shorter duration, laddered portfolios will allow maturing bonds to be reinvested into higher-yielding bonds if interest rates grind higher as expected.

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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).