Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • The biggest tax reform legislation in 30 years, along with looser regulations and planned government infrastructure spending, is expected to fuel faster U.S. economic growth this year, implying quarterly GDP growth above 3.5% in some cases.
  • Tight inventories and strong demand have pushed housing prices higher, with new home sales up nearly 34% in November from the start of 2017, suggesting continued strength in the construction market.
  • Given historically low unemployment (4.1% for four straight months through January), the Fed will closely track monthly average hourly wage growth to gauge the pace of interest rate hikes needed in 2018 to stay ahead of inflation. 

Equity Outlook

  • Although the market is seen as overpriced with several S&P 500 sectors trading above 20-year averages, tax cuts could boost earnings growth, making P/E ratios appear more reasonable.
  • U.S. economic cycle should be extended with Europe, China and the rest of Asia much earlier in their own cycles and just hitting their stride. U.S. multinationals should benefit, but investors are advised to focus on good-quality companies with relatively low debt levels and diversified operations.
  • Elevated valuations mean companies are likely to deploy cash on hand toward dividend increases over stock buybacks, if they don’t see prospects for organic growth.

Fixed Income Outlook

  • Washington policy decisions will be a major influence in the bond market, as the Fed’s focus on inflation and shrinking of its mammoth balance sheet are likely to boost interest rates in 2018.
  • 10-year Treasury yields have resisted increases due to scant signs of inflation and foreign liquidity from Europe and Japan, where yields are near zero. Slowing of foreign central bank quantitative easing programs could draw buyers out of U.S. Treasuries and push rates higher.
  • Credit spreads in investment-grade corporate bonds have shrunk to their tightest levels in 10 years and could narrow further if new issuance in months ahead proves lighter than expected.

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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).