Branstad: Hi, everyone. Thank you for joining us here at Thrivent Asset Management. I'm Jeff Branstad, portfolio manager.
Lowe: And I'm Steve Lowe, Chief Investment Strategist.
Branstad: Steve, let's talk a little bit about Thrivent Asset Management's outlook for the rest of the year and going forward. It's been a very difficult start to 2022 with stocks, treasuries and credit markets off significantly. How are we reacting for that for the rest of the year?
Lowe: First, we expect continued volatility. That is typical within a bear market. You often see rallies of 10–20%, and then down; another rally... The important point here is that markets are grappling with how far the Fed is going to have to raise rates, when or if inflation will roll over, and how quickly and whether or not we head into a recession. We are still relatively optimistic on a longer-term basis.
We are overweight equity. If we've got a very, very sharp rally, we might trim a little bit. But I think it's important to have a long-term horizon and stay in the game, essentially, because we have reached levels where, over the long run, the odds of having a negative return are significantly lower. And once you hit a bear market within a year, the odds are only about 20% that you're going to be down to a bear market level. So, we're still positive.
We're overweight domestic equities. This vision we've had which puts us underweight equities, we think domestically the earnings growth long-term [will have] stronger and better return on capital. These are secular trends. Europe has issues; Europe is most likely heading into a sharp recession. Inflation is high; the ECB is raising rates. There's a war in Ukraine and they face a potential of getting natural gas shut off. China has issues too. They have continued Covid lockdowns, where some large percentage of their GDP is often in partial or full lockdown. And then the property sector is also troubling there. And you have government intervention.
Branstad: How about within domestic equities? Market cap, style positioning – how are we doing there?
Lowe: We like small caps. We're close to moving more significantly overweight there. Small caps tend to do well when you catch them at the bottom when things are bad, when credit spreads are out and confidence is low, then they tend to rally hard into recovery. But valuations are at a very attractive level right now.
We still favor growth. Growth tends to do better in an economic slowdown.
Branstad: How about shifting gears to the fixed-income side of the house? What are we doing with rates?
Lowe: We've been short duration or short interest rate risk all year long. We recently got [to a neutral position] on the expectation that long-term rates would start falling, and that has happened as the economy has slowed. We think that will stay. Rates could still rally, but we've probably put in a high or close to the high for the year. We expect short-term rates to go up and the curve to stay [flatter and more inverted] until you see signs that the Fed might cut rates.
Branstad: How about credit? What's the house view on credit?
Lowe: Credit is looking interesting right now. It's at a level where it typically either goes substantially wider or rallies from there, tipping between a recession or a recovery. We'd like to see credit spreads move out more before getting really excited about adding to credit. But that's not terribly far away. But, definitely, if credit spreads get to recessionary levels, we would start buying.
Branstad: Any other areas in the fixed-income market that are catching your eye?
Lowe: Emerging markets are interesting. They've been very beat up; part of that is rates, part of that is trouble for emerging markets. There's a strong dollar. Inflation is so high [in emerging markets], so are the rates. That's something we're watching closely going forward.
The preferred market also looks interesting. They got beat up because of higher rates in particular, and most preferreds are out of financial institutions. Banks are very high quality; they have much, much stronger balance sheets than they did [going] into the Financial Crisis. So, that's another area that looks interesting.
Branstad: Thanks again for joining us today. For more information, please visit us at thriventfunds.com. Goodbye, and we'll see you next time.