Tariffs. Geopolitics. Fiscal policy. There are many threats to the U.S. economy. How might investors prepare for uncertainty? Coming up, we discuss fixed income opportunities.

From Thrivent Asset Management, welcome to Advisor’s Market360™, a podcast for you, the driven financial advisor.

The first few months of the second Donald Trump administration have been chaotic for the economy — to say the least. From tariff levels to fiscal policy to geopolitics, it seems that the only thing that’s certain is uncertainty. Investors have learned very quickly that the short-term market environment is hard to predict. Add in the fear of a potential recession, it’s not surprising that investors are seeking the traditionally safe harbor offered by fixed income. That’s why we invited Kent White, vice president of Fixed Income Mutual Funds at Thrivent Asset Management, to answer your questions about fixed income in the current volatile environment. Let’s get to it.

With the extremely volatile markets of late, what role should fixed income play in a portfolio? Here’s what White had to say:

White: When market volatility is as high as we've been experiencing lately, that is exactly when fixed income can play an important role in providing stability in well diversified portfolios. Price volatility for one is much lower in fixed income, and it’s also providing an attractive yield right now, yields which are much higher than they’ve been in over a decade. And it's these attractive yields and lower volatility that make fixed income an important source of ballast in portfolios, especially when uncertainty is as elevated as it is right now.

We asked White to go a little deeper on the why uncertainty is roiling the markets…

White: Every asset class that you look at, equities, the fixed income market, credit markets, they've all been extremely volatile, waiting for some clarity on what's going to happen with the forward-looking macroeconomic environment. So, we've definitely seen a lot of volatility so far in 2025. Most of that volatility has been centered around trade policy and tariff policy. So, we saw on April 2nd, the day that tariffs were announced, a huge amount of volatility and the market sold off because they were much more aggressive tariffs than the market was anticipating. So, a recession is still not our base case, but risks are certainly higher. The probability of the recession is higher than our baseline was at the beginning of the year but has since come down due to the de-escalation of the tariff talks with China. There's just been a lot of uncertainty and volatility in the markets, and it's almost all been caused by that. So, one of the things that we've seen in the fixed income markets is just a flight to quality. 

You just heard White mention the “R” word — recession. As he stated, recession is not the base case at this time. But the odds of one are increasing. So, we wanted to know ways for investors to take advantage of opportunities fixed income presents to prepare for a potential recession. Here’s White:

White: At this point, we don't feel like a recession is likely. In uncertain economic environments with elevated risk of the downsides, though, investors, especially more risk-averse investors, should consider shifting more of their assets into high-quality fixed income. If we were to experience a recession, fixed income is usually a safer place to be than equities. And our experience this year is a good example. As recession fears mounted, equity is broadly underperformed. By the end of April, the S&P 500 was down nearly 5% year to date. The Bloomberg US Aggregate Index, which is the broadest fixed income benchmark, was actually up over 3%, a performance differential of nearly 8%, and that differential was even larger during the worst of the equity sell-off. So, if we do find ourselves in a recessionary environment, first thing to do is try to remain calm. Second, you really want to begin to think about shifting more of your assets like we spoke about earlier into fixed income. 

We asked White for some specific suggestions that investors might consider in the event of a recession.

White: In front of a recession, you want to be generally positioned in high-quality fixed income. You also might want to consider shifting some of your assets from money market funds. Right now, there's a lot of money parked in money market funds waiting for the Fed to begin lowering rates again. So, the Fed is not going to begin lowering rates until they actually see some weakness in the economy, whether it's the labor market or other signs of softness. So, at that point, you would want to begin to extend your duration into further out the curve, whether it's short-duration bond funds or intermediate bond funds. There's plenty of opportunity in the treasury market, too, if you really wanted to stay high quality.

While White does not currently think a recession is likely, we wanted to know what factors might change his thinking…

White: The things that would make us a little bit more concerned about a recessionary outcome would be mostly tariff related. The price impact could have an impact on consumer spending behavior. So, if we see the consumer begin to pull back in their consumption habits, that could really have an impact on the economy. And we'll also be looking at how businesses respond to this new environment, too. Are they going to dial down their capital expenditure spending? Are they going to begin to either stop hiring people or even begin to let people go? Those are the three big things that we'll be looking at, consumer behavior with their spending, businesses, how they react to the new tariffs, and whether they continue to spend money or begin to lay people off. Those would be the trigger points that we'd be looking at. So, one thing you might want to consider doing is moving money that's been parked in a money market fund, further out the curve into more of a short-duration bond fund or an intermediate maturity bond fund There is plenty of opportunity in the treasury market too, if you really wanted to stay high quality. 

We have covered a lot of ground in this episode, so here’s a quick recap of the four key takeaways:

Takeaway one: The past months contained a lot of economic and political headlines that created uncertainty and thus market volatility. The economy is slowing but investors should not over extrapolate long-term trends from short-term data. 

Takeaway two: Because volatility is likely to persist, it’s prudent to maintain a diversified portfolio as we await greater clarity on global trade policy and its impact on the economy and inflation.

Takeaway three: Tariffs have the potential to slow growth materially and push up inflation. It’s too early to call a recession, but the odds have risen meaningfully.

Takeaway four: While market volatility is likely to remain high, we continue to recommend taking a longer-term investment view.

We hope this episode offered some reassurance and some ideas about how to move forward. Once again, we would like to thank Kent White for his insights. What did you think of this episode? Email us at podcast at thriventfunds.com with your feedback or questions for our experts. Want more episodes of Advisors Market360 and other market and investing insights? Visit us at thriventfunds.com, where you can learn how we can partner with you, the driven financial advisor. Bye for now.

All information and representations herein are as of 5/14/2025 unless otherwise noted.

Past performance is not necessarily indicative of future results.

Investing involves risks, including the possible loss of principal.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Any indexes mentioned are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

While diversification can help reduce market risk, it does not eliminate it. Diversification does not assure a profit or protect against loss in a declining market.

Asset management services provided by Thrivent Asset Management, LLC, an SEC-registered investment adviser. Thrivent Asset Management, LLC is a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.