Quarterly Market Update
Quarterly Capital Markets Review and Outlook
U.S. Economic Outlook
- There remains the possibility of a December fed funds rate increase.
- The most significant headwind for higher interest rates continues to be the stubbornly low level of inflation.
- The rally in the U.S. dollar has hopefully run its course or the pace of the rally will slow given that the glide path of future rate increases has been altered by tepid domestic and global data.
- Concerns surrounding hurricane season and possible Middle East supply interruption caused by conflict in Syria could boost oil prices before year end.
- Fundamentals remain in place and favorable central bank policy can support the continuation of a bull market, albeit one characterized by more modest returns.
- While fundamentals do not support a huge equity market rally, neither does there appear to be a catalyst for a recession, and subsequent bear market.
- Should the slide in earnings continue, either multiples must expand – highly unlikely in the face of ongoing global weakness, or equities will continue to struggle in 2016.
- The degree of bearishness in the stock market has mushroomed to the point that it could potentially be a bullish contrarian indicator.
Fixed Income Outlook
- We anticipate that the yield on the 10-year Treasury will end the year at around 2.40%.
- The future path of Treasury yields will be a function of Fed movements and safe haven buying, if any. Also, by managing its currency, there is the potential for China to liquidate more U.S. Treasury securities which may prop-up rates.
- Two factors could raise yields and widen corporate credit spreads over the remainder of 2015 – first the fact that November and December are seasonally the strongest months of the year for equities which typically means interest rates move higher as growth/inflation fears intensify, and the second is heightened bond liquidity risk associated with regulatory changes.
- The municipal market will likely continue to take its cues from the Treasury market.
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).