Quarterly Capital Markets Review & Outlook

U.S. Economic Outlook

  • Economic output has surged as lockdown restrictions have eased and some economic activities have been restored. Economic policy continued to be a key catalyst to growth, particularly fiscal policies that sustained household incomes despite a collapse in hours worked.
  • Coinciding with the strong recovery in economic growth, the labor market continued its improvement with strong gains in leisure & hospitality, retail, and professional & business services. While the pace of the improvement in employment will likely be more gradual.
  • The change in the Federal Reserve’s forward guidance signals they intend to keep interest rates at the zero lower bound indefinitely. The Fed communicated it intends to remain very supportive through 2023, and communicated no meaningful changes to their current strategy on asset purchases.

Equity Outlook

  • With concerns and anticipation building around COVID this winter, the upcoming earnings season is likely to be especially meaningful to market outcomes. We are already seeing a record low number of companies releasing guidance making it especially difficult to assess the direction of earnings.
  • Despite exceptionally high valuations, the historic low yields on bonds means that spread is still tilting toward stocks. Unfortunately, barring a new pro-growth environment, investors are looking at historically-low expected returns across the board.
  • While COVID is likely to have the greatest impact to the economy and markets over the next six months, the election results could also produce short- term volatility. A change in regime would also likely impact economic and market trends.

Fixed Income Outlook

  • The fixed income markets were relatively stable in the third quarter of 2020. After the initial shock and volatile reaction of the market in the first quarter, the Fed programs and fiscal stimulus enacted in the spring calmed the credit markets.
  • Credit spreads in the secondary market generally tightened in the first part of July before settling into a pretty narrow range for the remainder of the third quarter. The high yield sector followed a similar path in credit spreads throughout the third quarter. Municipal bond yields were range bound for much of the third quarter - the positive returns were driven by steady investor demand as investors continue to be attracted to municipal bonds not only for tax-free income, but for the attractive relative value.
  • For the remainder of 2020 the markets will focus on the continuing effects of the coronavirus pandemic, the attempts by Congress to pass additional fiscal stimulus after the elections, and the pace of the recovery in the employment markets. It would be prudent to assume that 10-year interest rates continue to close under 1.00% for the remainder of the year, and with the Fed backstopping the market, that credit risk spreads continue to be tame.
Fourth Quarter 2019

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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).