Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • GDP expected to grow 2.8% in 2018, but the extent to which tax cuts buoy the economy will possibly be offset by the impact of a potential U.S./China trade faceoff and the Fed’s inflation-fighting measures.
  • U.S. housing prices have risen on constrained inventories and lower home construction, making it harder for people to buy a home. Although home equity values have risen to record levels, the wealth effect could weaken on higher interest rates, prompting a higher savings rate and posing risks to consumer spending.
  • Despite unemployment at near 18-year lows and the number of people quitting jobs rising to a 17-year high in March, wage growth remains in check, partly due to highly paid baby boomers retiring and being replaced with lower-wage workers.

Equity Outlook

  • An anticipated 17.3% surge in earnings growth in the first quarter would be the highest rise in 7 years and is helping justify rich P/E valuations, but positive earnings that miss forecasts are likely to spur selling.
  • Rising interest rates and a potential inflation bump suggest that discount rates for stocks are poised for a sharp increase, which could overwhelm earnings growth and adversely affect valuations.
  • Stronger dollar versus foreign currencies could undercut positive returns that U.S. investors reap from international stocks, where we expect continued robust performance this year.

Fixed Income Outlook

  • With the Fed’s retreat as a major buyer of U.S. debt, other buyers need to step up, especially if tax cuts’ adverse impact on the federal deficit are not offset by an increase in revenue expected to result from a larger tax base if job creation grows.
  • Credit spreads on corporate bonds are off 11-year tight levels seen in January but remain tight mostly due to a 15% drop in issuance in the fist quarter compared with a year ago.
  • Munis had their worst first quarter since 2005 as selling by banks and insurance firms overpowered a 25% decline in supply. But yields are reaching levels that have attracted buying in the past and lots of money is waiting on the sidelines.

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BBVA Compass is the trade name for Compass Bank, Member FDIC, and a member of the BBVA Group. Securities products are NOT deposits, are NOT FDIC insured, are NOT bank guaranteed, may LOSE value and 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), BofA Merrill Lynch U.S. Treasuries 1-10 years, BofA Merrill Lynch U.S. Agencies 1-10 years, BofA Merrill Lynch U.S. Corporates 1-10 years A-AAA, BofA Merrill Lynch U.S. Municipals 1-10 years A-AAA, Russell Top 200 Index, Russell 1000 Index, Russell Midcap Index, Russell 2500 Index, Russell 2000 Index, Credit Suisse High Yield Index (CSHY), MSCI U.S. REIT Index (RMZ Index).