Quarterly Capital Market Review & Outlook

U.S. Economic Outlook

  • Growth abroad versus growth in the U.S. continues to diverge. While economic conditions continue to falter abroad, the U.S. economy remains solid. 
  • The inversion of the yield curve in March had investors worried that a recession was looming. However, the predictability power of the yield curve has waned. Fundamental economic data, such as job growth and leading economic indicators, still suggest that the U.S. economy has further to go. 
  • A key question for 2019 will be if the unresolved trade tensions and weakness in global growth may begin to filter into the U.S. economy. A dovish Fed and a trade agreement between the U.S. and China should help support domestic growth.

Equity Outlook

  • Markets posted strong returns in the first quarter supported by strong earnings growth in 2018. Looking forward, earnings growth in 2019 is expected to decline. 
  • High quality companies will continue to remain a “home-base” to investors amid rising corporate margin pressure, trade tensions, and weakening global growth. 
  • Emerging markets remain attractive. The dollar, however, which has a significant impact on expected returns, may serve as a tailwind.

Fixed Income Outlook

  • The change in the Federal Reserve’s monetary policy should narrow the path of interest rates in 2019. It is likely that we will see the 10-year Treasury trade between 2.35% and 2.75% for the year. 
  • High yield bonds had their best first quarter since 2003. A strengthening commodities market should continue to support the high yield sector. •
  • The municipal market continues to have positive momentum due to the diminishing impact of further Federal Reserve rate hikes, increased investor demand, and limited new-issue supply.

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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).