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OUR VIEW

A look ahead: Fourth quarter 2024 outlook

10/12/2021

10/15/2024

10/12/2021

A look ahead: Fourth quarter 2024 outlook
  • The Federal Reserve's (Fed) expectations are that inflation will continue to fall despite its attempts to boost the economy through lower interest rates. However, we will likely have short periods when inflation rises, particularly from the cost of housing, strong wages or as a result of seasonal effects.
  • It is also important to keep in mind that the Fed raised rates more aggressively than at any time since the 1980s in response to an equally atypical surge in inflation. Despite the recent 50 bps cut, the Fed Funds rate is still above its “neutral” rate—the rate at which interest rate policy is being neither restrictive nor accommodative.
  • Our projections are for two rate cuts of 25 bps each in the remainder of this year. Looking ahead to 2025, we have no reason to believe the Fed’s projections for four cuts of 25 bps is too little or too much.
  • Lower interest rates amid healthy consumption, strong earnings growth and a stabilizing job market will only help the economy recover as lower rates quickly help consumers by lowering the interest payable on borrowing, including credit cards, auto loans and home mortgages.
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Capital Markets Perspective
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Asset allocation views: Current outlook

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Equity vs. Fixed Income

As the S&P 500 closed the third quarter with an impressive +20% year-to-date return, marking its strongest performance during a presidential election year in history, we believe it’s wise to approach the fourth quarter with some caution.

While inflation has slowed, elevated pricing continues to weigh on the average consumer. This strain has been amplified by a decline in employment opportunities, as highlighted by various sentiment indicators, which could lead to a slowing of retail sales.

Presently, we continue to maintain a slight overweight to equities in our asset allocation views, and do not have immediate plans to modify our position. While near-term risks have modestly increased during the third quarter, we still see economic expansion as the more likely path forward.

Equities

Equities

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U.S. vs. Int’l.

We are underweight international primarily in Europe and, to a lesser extent, emerging markets. We U.S. favor domestic over international in the intermediate- to long-term for a variety of reasons, including peak globalization, a higher degree of innovation domestically, greater demographic challenges internationally, structural issues in Europe and a more favorable climate for businesses domestically (e.g. regulation).

Though China's recent stimulus announcements brings the 2024 year-to-date total to almost $1.1 trillion (~6% of gross domestic product) if fully implemented, significant long-term headwinds remain including a declining working age population, massive oversupply of housing, and more.

Europe continues to struggle, particularly in manufacturing and Germany. The European Central Bank is easing, but so is the Fed.

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Market Cap

Domestically, we are overweight both large- and mid-caps, while maintaining a modest underweight in small-caps. The Fed started its rate cutting cycle in September. For the last five initial rate cuts (six if 1998 is included) dating back to 1989, only one of them (Jan 2001) was followed by small caps clearly beating large caps on a relative basis over roughly the next 6-12 months, and that was due to the tech bubble unwinding.

We continue to recognize that the euphoria in the mega cap tech trade could be a vulnerability for large relative to small in the more near-term as the market broadens, but remain somewhat underweight small-caps with the intermediate and longer-term horizons in mind.

Fixed-income

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Duration

The Fed has two mandates from Congress – price stability, which is inflation, and maximum employment, which is the labor market. We expect the Fed to cautiously but steadily lower the Fed Funds rate to ease from a restrictive level toward accommodative policy to support continued economic growth. The pace and depth of cuts is a balancing act between lowering the target rate quickly enough to enable a soft landing but not so fast as to reignite inflation.

The key risks to rate cuts are stronger than expected growth and a resurgence of inflation. We expect the Fed to cut rates at a pace closer to market expectations. We also expect Treasury rates over time to follow the Fed Funds rate lower.

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Credit Quality1

Fixed income credit spreads tightened modestly in the third quarter but with some volatility in August as equity markets sold off sharply before recovering. Spreads for high-yield and investment -grade corporates remain well below long-term averages and medians and are in the bottom quintile (rich) or lower of historical performance. We expect default rates to be moderate, as lower interest rates and open capital markets enable companies to refinance debt.

Looking ahead, we expect the Fed's interest rate cuts, along with lower Treasury rates, to support credit markets by decreasing funding costs and lowering interest expense over time. Key risks include a significant weakening in the economy or an unexpected surge in inflation prompting the Fed to pause rate cuts or even raise its target rate

This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.

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.

Investing involves risks, including the possible loss of principal.

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