Quarterly Market Update
Quarterly Capital Markets Review and Outlook
U.S. Economic Outlook
- A slow start to the beginning of the year means economic growth in subsequent quarters must exceed 3.5% in order to reach the current 2.9% annualized GDP growth forecast.
- We do not expect to see wage inflation accelerate until the capacity utilization rate moves well above its current level of 78.4%.
- The strong U.S. dollar will remain a significant headwind for the export- dependent manufacturing sector.
- We anticipate that oil production will continue to fall for the remainder of the year, perhaps gaining strength in 2016.
- We estimate there is a 50% chance that a single interest rate hike occurs in 2015 and a 50% chance that there is no rate hike until 2016.
- We have a somewhat muted outlook for equity returns for the next six months based on earnings expectations.
- In terms of asset allocation, we are focused on U.S. small-cap companies and international stocks. We are also targeting growth at a reasonable price over a value investment strategy.
- We anticipate that stock market volatility as measured by the CBOE Volatility Index (the VIX) will increase.
Fixed Income Outlook
- We anticipate that the yield on the 10-year Treasury will continue to hover within a narrow band of 2.25% to 2.50%..
- Corporate credit spreads will tighten to levels seen at the beginning of the second quarter, barring any significant credit event.
- While the absolute return of municipal bonds may not be positive in a rising interest rate environment, the return should remain strong relative to other asset classes within fixed income.
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).