Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • 2018 marked the end of global growth synchronization. Growth abroad has tapered off, particularly in the Eurozone and China. The U.S, however, is still reporting solid fundamentals. Expect growth to still be positive, albeit more subdued in 2019.
  • The Federal Reserve will be key in influencing future growth. Concerns the Federal Reserve will tighten monetary policy beyond what the economy can handle have risen, but the Fed has indicated it plans to be increasingly more data dependent going forward. Currently, the Fed is projecting two rate increases in 2019. 
  • Rising uncertainty regarding fiscal policy and the trade negotiations with China are likely to be two of the most important factors affecting U.S. growth.

Equity Outlook

  • Amid the changing economic framework, volatility has returned to levels we haven’t seen for some time. However, we do not believe the current market cycle has run its course. 
  • Due to the tax cuts enacted in 2018, corporate earnings growth surged. Earnings growth in 2019 is more uncertain as investors adjust to the changing global economic framework and various geopolitical issues. 
  • While volatility may cause “wobbles” or declines in the stock market, it can also boost returns. As such, emerging market investments may offer more robust average returns over the next ten years.

Fixed Income Outlook

  • In the fourth quarter, credit spreads widened and Treasuries rallied causing the yield benchmark 10-year Treasury note to end the year at 2.68%. The path of rates and credit markets in 2019 will depend heavily on how the U.S. economy performs. 
  • Despite concerns over the yield curve, we do not expect the curve between the 2-year and 10-year Treasuries to invert. Rather, we anticipate the yield curve will remain slightly positive. 
  • Municipal bonds rallied at the end of 2018. It is likely the municipal market will continue to rally in 2019 amid rising supply and steady demand. 

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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).