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A look ahead: Fourth quarter 2022 outlook




Given this market environment, here are our views on economic and market prospects:

Rates. We expect the Federal Reserve (Fed) to pause early next year and cut rates later in 2023. The Treasury yield curve should remain inverted, as short-term rates remain anchored by Fed rates and longer-term rates stabilize and then decline, reflecting slower economic growth.

Equities. We expect that the uncertainty over the path of inflation and interest rates will diminish toward the end for 2022 and into the first part of 2023. That should set the stage for markets to recover. Equity markets historically have not sustainably rallied from bear market lows until the Fed has stopped raising rates and begun cutting rates.

Credit. Credit sectors offer attractive yields not seen in years. Credit spreads, an indicator of risks such as default, have widened but remain below recessionary levels. We expect spreads to widen into next year as the economy slows before stabilizing and rallying. We are closely watching credit spreads as they often foreshadow equity moves.

Related content:

Capital Markets Perspective (PDF)

Asset allocation views: Current outlook

Tactical vs. peers position


Equity vs. Fixed Income

  • Thrivent’s view is a slight overweight to equity versus fixed income.
  • While the markets were very oversold at the end September, which can set-up for a near term rally, the economy continues to weaken, and the Fed appears resolute in its fight against inflation.
  • Until there is data that suggests an end may be coming to the tightening cycle, risks continue to skew to the downside, and therefore it is not yet time to increase risk asset exposure.




U.S. vs. Int'l.

  • We have grown increasingly worried that central banks are making a policy error given the recent escalation in hawkish rhetoric, which can result in areas of the markets breaking.
  • There are increasing geopolitical tail risks, resulting from actions such as the destruction of the Nordstream pipeline, recent annexation of Ukrainian territory and North Korea’s ballistic missile test over Japan.
  • The U.S. economy remains the higher quality asset among rapidly deteriorating global economies, thus making the U.S. markets the less bad area to allocate equity assets.


Market Cap

  • Within equity, we remain overweight in small and mid caps – mid caps to a greater extent. While small caps look very attractive both on a sentiment and valuation basis versus large caps, the economy continues to deteriorate which is not favorable to smaller capitalization companies.
  • We will continue to watch for Purchasing Manager’s Indexes (PMIs) to bottom and stabilize in addition to credit spreads widening before increasing weight in small cap.
  • From a risk-to-reward point of view, as the U.S. economy continues to deteriorate, it may not yet be time to fully commit to the riskiest of securities in the capitalization spectrum.




  • The Fed tightened aggressively during the third quarter, bringing its overnight Fed Funds rate from 1.00% to 3.25%. This caused sharp increases in Treasury interest rates across the yield curve, leaving investors with negative returns.
  • During the quarter, shorter duration Treasuries outperformed longer duration Treasuries. 2-year lost 1.60%, 10-year lost 5.75% and 30-year lost 10.40%. Because of their negative returns, they didn’t provide good hedges against falling prices in other asset groups such as equities.


Yield Curve

  • An inversion of the yield curve occurred in the third quarter as 2-year yields rose faster than 10-year yields.
  • As the Fed tightens, it increases short-term interest rates to combat inflation. There is always a risk the Fed will over-tighten and this can put the economy into recession.
  • An inverted curve generally forecasts a recession occurring in six to 18 months. Before the recession occurs, the Fed will start easing and the yield curve will steepen.
  • We believe the Fed will keep Fed Funds rates high longer than normal since they have high inflation to fight. We also believe a recession could occur in 2023. 


Credit Quality1

  • Looking ahead, we expect credit markets to be increasingly driven by a slowing economy in addition to Fed rate hike expectations and inflation.
  • Credit markets such as high yield and investment-grade corporates reflect tighter financial conditions resulting from the Fed’s rate hikes, including increasing risks of a meaningful economic slowdown and a growing risk of a recession.
  • Corporate spreads are only moderately above long-term averages and medians and have further downside if the economy tips into a recession.
  • Corporate earnings estimates have started to decline and likely will decline further, but balance sheets remain strong.

1 Credit Quality ratings are determined by credit rating agencies Moody’s Investor Services, Inc. or Standard & Poor’s Financial Services, LLC.

The Senior Investment Team is discussing the asset classes, sectors and portfolios they oversee at a macroeconomic level. The views expressed are as of the date given unless otherwise noted and 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 recommendations of any particular security, strategy or product.

Past performance is not necessarily indicative of future results.

Related insights

August 2023 Market Update


Stock rally continues

Stock rally continues

Stock rally continues

U.S. stocks rallied again in July, with both the S&P 500 Index and the NASDAQ Composite Index generating the strongest performance in the first seven months of a year since 1997. July’s performance was notable for seeing a rise in all 11 sectors of the S&P 500 Index, led by Energy, which was supported by a surge in oil prices over the month.

U.S. stocks rallied again in July, with both the S&P 500 Index and the NASDAQ Composite Index generating the strongest performance in the first seven months of a year since 1997. July’s performance was notable for seeing a rise in all 11 sectors of the S&P 500 Index, led by Energy, which was supported by a surge in oil prices over the month.