OUR VIEW
10/12/2021
04/22/2026
10/12/2021
The conflict in the Middle East has significantly increased volatility in global capital and energy markets. While the timing of this conflict’s resolution is uncertain and may continue to provide heightened volatility, we can look to history to show that geopolitical events rarely have lasting effects on markets or economic growth. We therefore maintain longterm focus and a moderate overweight to equities.
The economy entered 2026 on solid footing, supported by deregulation, lower tax rates, and favorable fiscal and monetary policies. Industrial activity and business surveys show improvement. The sources of concern include a somewhat fragile labor market and the risk that a prolonged oil price shock could lead to higher inflation.
With regard to inflation concerns, it’s notable that market expects inflation due to the Middle East disruption to be short-lived. The medium and long-term inflation indicators, as gleaned from the treasury swaps and TIPS market, show inflation to remain contained.
Fixed income vs. equity
The markets reacted positively to the ceasefire announcement of early April. If there is a durable de-escalation, the economy and the markets are positioned to perform well.
Among concerns are the signs of weakness in the labor market and a softening housing market.
The U.S. consumer remains resilient, as retail sales growth has been steady. Manufacturing and productivity data have shown improvement as well.
Despite recent volatility, we continue to prefer a modest overweight to equities in asset allocation strategies.
Equities
Equities
U.S. vs. Int’l.
In Q1, international and emerging markets stocked outperformed U.S. stocks.
We continue to assert that the eurozone faces challenges to growth compared to the U.S., including poor demographics, higher regulatory burdens, and less innovation and investment. The eurozone, a large net importer of oil, is also more exposed to energy prices shocks.
We continue to favor U.S. equity over international, correspondingly maintaining an underweight to developed and emerging markets.
Market cap
U.S. small cap stocks outperformed large caps in Q1 and over the trailing 12-month period. Lower quality companies, with lower profitability, have led the small cap rally. Typically, lower quality stocks lead when the economy is coming out of a recession, which is not the case in
this cycle. We view this as a sign of increased speculation in the market.
Periods of low quality/low profitability leadership historically tend to be short-lived, and higher quality/higher profitability stocks.
Because high quality companies are currently better represented in the large cap stock universe, we maintain an overweight to large cap and an underweight to small cap.
Fixed income
Duration
Yields rose across the Treasury curve in Q1 as the market reacted to the dramatic spike in oil prices and related inflationary concerns. Shorter-term yields rose more than longer term yields, flattening the 2-10 Treasury spread, indicating that the market had ‘priced out’ an expectation that the Fed would be cutting rates in the near term.
We expect the Fed to hold rates steady well into the year, as they watch for their favored inflation gauge, PCE (Personal Consumption Expenditures Price Index), to make more progress towards the stated target of 2% long-run inflation.
While the Fed heavily influences the shorter end of the treasury curve, longer term rates are driven by the market’s view of the paths of inflation, fiscal deficits, and economic growth.
Our positioning favors a flatter yield curve with a modest overweight in longer duration Treasuries and corresponding underweight in duration on the short end.
Credit quality1
Credit spreads (the extra yield bond investors demand over Treasuries for securities of a similar maturity) widened in Q1 but remain below long-term averages. Credit rallied to begin the quarter, but reversed course as investors reacted to surging debt issuance by AI companies seeking to fund data center capex.
The conflict in the Middle East also caused spread widening, as higher commodity prices threaten to both fuel inflation and slow growth. Private credit markets were also under stress, as large funds saw outsized redemptions requests.
The macro foundation for credit markets is sound. Strong corporate fundamentals, healthy consumers and supportive government policies bolster our confidence. Additionally, higher yields have attracted both institutional and retail investors, providing market stability.
We favor higher quality fixed income, including investment-grade corporates, securitized bonds (including mortgages and collateralized loan obligations). We would seek to opportunistically add exposure to credit if spreads widen.
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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