Quarterly Capital Market Review & Outlook
U.S. Economic Outlook
- Economic growth deteriorated in the first quarter of this year and is likely to decline dramatically further in the second quarter. However, as states begin to reopen and containment measures are eased, activity may begin to rebound in the second half of the year.
- The federal government has unleashed waves of monetary and fiscal stimulus to support the economy. Additional measures are likely if the outlook fails to improve.
- Labor market conditions have weakened as a result of stay-at-home and social distancing measures significantly impacting consumer spending. The unprecedented rise in initial jobless claims suggests we may see the unemployment rate hit double digits in the second quarter.
- Supply chain disruptions and elevated uncertainty suggest we will see a continuation in production cuts and weaker business investment, especially with depressed crude oil prices.
- The first quarter of 2020 marked the end of the bull market with the quarter closing as the worst first quarter on record with the S&P 500 down 19.6%.
- Corporate fundamentals will largely be tied to the economic impact of the virus. With much of the world on lockdown, expectations are for corporate earnings to decline in the first two quarters of this year. While prices have declined, equities may begin to look expensive if earnings fall by equal or greater measure.
- In the first quarter, the size factor was one of the most important in terms of results. Small cap companies, which tend to be more concentrated or rely more heavily on debt, struggled the most returning -30.6%.
Fixed Income Outlook
- In the first quarter, Treasury yields dropped and investment grade credit spreads widened significantly as revenue concerns began to creep into the fixed income markets. By the end of the quarter, Treasury yields began stabilizing and credit spreads started tightening as a result of credit support from the fiscal and monetary policies implemented.
- The high-yield sector behaved similarly to the investment grade credit market in the first quarter. While the high yield sector has bounced back somewhat as a result of the Federal Reserve’s new policy to purchase investment grade and high yield bonds, the recovery in this space remains constrained by anemic energy prices.
- Municipal bonds sold off in March over revenue and liquidity concerns but quickly stabilized as the Fed announced its plan to purchase short-term municipal debt to ease turmoil in the market.
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BBVA is the trade name for BBVA USA, 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).