Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • The U.S. economy remains strong as it grew at one of the fastest rates of the expansion in the second quarter, with GDP advancing at an annualized rate of 4.2%. For the year, GDP is expected to grow 3.0%, with the second half of the year feeling the impacts of tariffs and trade tensions.
  • The labor market continues to tighten, with the unemployment rate dropping to 3.7% in September, and average hourly earnings rising at an annualized rate of 2.9%, the fastest pace since June 2009.
  • The Federal Reserve removed the “accommodative” description from the FOMC statement, but remains largely accommodative in its stance on monetary policy. The Fed raised short-term interest
    rates 0.25% in September and is expected to do so again in December. The market expects three rate hikes in 2019.

Equity Outlook

  • Third quarter 2018 is not expected to be quite as strong as it was in the first half of the year, with consensus currently around 20%. An important focus for investors will be the impact of trade tensions and tariffs.
  • Monetary policy and inflation concerns will continue to impact equity performance as investors watch for forward guidance from the Fed. Rising interest rates could cause a shift in outperformance to value stocks from growth stocks.
  • International investments for U.S. based investors have lagged the domestic markets this year. Political concerns in the Eurozone and expectations for growth in China have led to negative returns for these regions through the quarter.

Fixed Income Outlook

  • U.S. interest rates rose in the 3Q18, pushing up the front end of the U.S. Treasury yield curve significantly and the back end up only somewhat. So far this year, the yield curve has flattened as the spread between 2-year and 10-year Treasury notes has dropped to 24 basis points from 52 basis points.
  • Credit spreads tightened in the third quarter and came close to year-to-date tights as the economy remained strong and supply remained light. Spreads may tighten further on maintained light supply and good economic conditions.
  • Municipal bond yields pushed higher in September due to lower demand on the back of rising Treasury yields. The fourth quarter is expected to see increased supply which, with rising interest rates, may add upward pressure to municipal bond yields.

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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).