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Quarterly Market Update

Quarterly Capital Markets Review and Outlook

U.S. Economic Outlook

  • Given that the economy is grinding toward full employment, the downward trend in monthly payroll growth is not unexpected.
  • Although average hourly earnings have improved, they are still not sufficient to generate any meaningful wage-push inflation that is typically indicative of an economy that has reached full employment.
  • Given that foreclosures peaked seven years ago, the black marks on credit reports are starting to roll off agency reports, which could lead to an uptick in the number of individuals getting back into the housing market.
  • Oil prices have improved, but we do not anticipate a return to previous levels of fracking or significant production increases until oil prices stabilize at or above $60 per barrel.

Equity Outlook

  • U.S. stocks are fully valued according to historical measures, and there is not a great degree of margin of error for either earnings, equity prices, or the economy to move.
  • It is not a foregone conclusion that the Brexit is as large an economic disaster as the initial market reaction would lead investors to believe.
  • Two significant drags on earnings of the past 12 months – the strong U.S. dollar and low oil prices – appear to be reversing, at least moderately, and helping to keep equity prices moving in the right direction.
  • We are comfortable adding to our U.S. stock position. International valuations are cheaper relative to those of the U.S., but not to an extent sufficient to offset Europe’s unpredictable economic environment.

Fixed Income Outlook

  • We anticipate that the yield on the 10-year Treasury will end the year under 2.0%.
  • Corporate bond yields will remain compressed as investor’s quest for income continues.
  • Foreign buying of municipal bonds is likely to continue as municipals offer a haven from financial-market turmoil.
  • A trend toward populist voting around the world poses a new risk to global economic growth.
  • The terms of the U.K. departure will be negotiated over a two-year period, perhaps holding much of the entire European continent somewhat in limbo for a protracted period of time.

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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;;; 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).