Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • The rare period of global growth synchronization appears to be at its end. While Eurozone growth is tapering off, the U.S. economy continues to strengthen. For the year, GDP is expected to grow 2.8%. The impact of trade war concerns is unlikely to show up in the near term, but may begin to materialize later on in the year.
  • Payrolls have increased consistently over the past 93 months. The strong employment environment has caused the labor force participation rate to spike causing the unemployment rate to increase slightly to 4.0%. Despite the solid labor market, productivity continues to weigh on wage growth.
  • According to the Federal Reserve, we have entered a new phase of economic policy after upgrading the outlook for the U.S. economy from “moderate” to “strong”. The Fed anticipates raising rates two more times in 2018 in order to prevent the economy from overheating as inflation begins to pick up.

Equity Outlook

  • Fiscal policy tailwinds in U.S. equities are expected to continue as companies are utilizing “found money” from tax cuts to execute stock buybacks whereby earnings per share are increased.
  • Volatility has without a doubt returned to the market in 2018 and is expected to remain. While it is unclear what path the market will take, there might be pockets of opportunity as U.S. stock valuations have fallen closer to their historical levels.
  • The stronger greenback versus foreign currencies could undercut positive returns that U.S. investors reap from international stocks, while U.S. corporate earnings are also expected to outpace those generated elsewhere.

Fixed Income Outlook

  • When the year began, it appeared obvious that Treasury yields would work their way higher as the result of rate hikes by the Federal Reserve and burgeoning inflation. As rates have increased the yield on the Two-Year Treasury has risen. So far though, the reaction of the long end of the yield curve to inflation has been muted.
  • While credit spreads have widened recently, overall credit spreads remain quite tight due to strong earnings and cash flows from corporate America. If second quarter earnings turn out to be as strong as expected, credit spreads should begin to tighten again.
  • Year to date, municipal bonds continue to outperform thanks to improving credit quality, strong domestic growth, and sharply reduced supply. Going forward we expect the strong relative performance of the tax exempt bond market relative to the taxable bond market to continue.

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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).