Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • Inflation has trended higher since 2016, but February’s 2.1% level indicates that the high unemployment and excess capacity which have dogged the U.S. economy since 2008 may be abating.
  • The Fed is targeting a 1.5% Fed funds rate for yearend, which could translate to as many as three additional rate hikes this year.
  • Higher prices and limited supply combined with a shortage of construction workers could impact the near-term housing market growth rates, and in the long run, lead to a slowdown in the overall housing market.
  • The improvements in manufacturing and services appear to be global. Indeed, the breadth of economic growth right now is the greatest that it has been in a number of years.

Equity Outlook

  • While the economic environment is more sustainable, we would be surprised to see a repeat of the double-digit returns of 2016, although equities remain a more attractive choice than fixed income.
  • The lack of attractive options is the biggest argument for the sustainability of the current stock market rally.
  • Should the yield on the 10-year Treasury rise to 3.50% or 4.00%, then bonds become a reasonable substitute for equities and some money could be expected to flow from the equity market to the bond market.
  • The inability of the governing party to pass the legislation to repeal and replace the Affordable Health Care Act calls into question the ability to pass tax reform or an infrastructure package.

Fixed Income Outlook

  • We anticipate that the yield on the 10-year Treasury will close the year between 2.50% and 3.00%.
  • With the Fed raising short-term interest rates, it will take inflationary pressures to push long-term interest rates up more than short-term interest rates in order to steepen the yield curve.
  • The high debt levels of some companies are beginning to concern pundits.
  • In the short run, municipals will closely track the Treasury market, and relative values should remain in the 90% to 98% range short of any significant advances in stimulus programs.

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Second Quarter 2017 Market Outlook
Total Returns - QTD and 1 Year

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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).