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A look ahead: Third quarter 2021 outlook


What are some key factors influencing the economy and markets in the coming months?

Vaccination success

  • Widespread vaccination efforts have led to a dramatic decline in infection rates, hospitalizations, and deaths.
  • The U.S. has responded with a growing economy and strong market returns; other countries should follow suit as vaccinations spread across the globe.

Interest rate reversal

  • After rising for several months, interest rates surprisingly reversed course and fell in the second quarter.
  • The Federal Reserve (Fed) announced they will soon start dialing back their unprecedented accommodative policies, but rates dropped nonetheless.
  • This behavior increases the amount of uncertainty in the bond markets as the Fed begins to shift policy.

Consumer strength

  • The consumer remains flush with cash and consumer wealth is at an all-time high (but distributed unevenly).
  • The labor market continues to improve and wages are steadily rising.
  • These factors should lead to large consumer spending and spreading to areas of the economy that have been somewhat neglected in recent months, too, like services.

Supply and demand

  • Demand remains high with consumers spending a lot of money.
  • Many businesses are still experiencing supply challenges, leading to supply chain bottlenecks, inventory shortages and rising commodity prices.
  • Some of these challenges are starting to resolve, but it will take time to get back to normal supply and demand dynamics.

Related content:

Capital Markets Perspective (PDF)

Asset allocation views: Current outlook

Tactical vs. strategic position


Equity vs. Fixed Income

  • Markets and economic data have generally done well this year and spending remains high despite some roll-off of stimulus effects.
  • Declining yields, a flattened yield curve, and lower credit spreads will limit fixed income returns from here.
  • As a result, we remain slightly overweight equity versus peers, but still slightly behind our long-term strategic targets.




U.S. vs. Int'l.

  • Within equity, we continue to favor domestic over international, but have started to add more exposure internationally, particularly in Europe as they begin to catch up on vaccinations and the "reopening" trade.
  • Within international, we prefer developed over emerging markets.
  • China makes up approximately one third of the MSCI Emerging Markets index; challenges there with an aging population, falling birthrates, a material debt burden and rising geopolitical tensions result in increased risk to emerging markets.


Market Cap

  • We remain overweight larger cap stocks while underweight smaller cap stocks.
  • Consumer sentiment trends appear to benefit larger companies.
  • With small-caps rallying significantly over the past six months, valuations on the large cap side have normalized, making large caps more attractive in relation to small caps.




  • Interest rates fell in the second quarter, surprising many fixed income analysts who expected a rebounding economy and increasing inflation to keep pushing rates upward.
  • We are still short duration compared to the broader market but have started to reduce that position by lengthening duration.


Yield Curve

  • The yield curve steepened sharply earlier in the year with short-term rates anchored at low levels by easy Fed policy and long-term rates increasing with signs of economic confidence and expectations of increased government spending.
  • However, this trend reversed in the second quarter with long-term rates falling and short-term rates rising.
  • A rebounding economy typically "steepens" the curve but expected Fed tightening typically "flattens" the curve.
  • With both of these dynamics in play, we have reduced the "steepener" position we had earlier in the year and are looking for opportunities to take advantage of changes to the yield curve.


Credit Quality1

  • Credit spreads continued to tighten during the second quarter, which, coupled with lower long-term interest rates, led the sector to positive total returns.
  • Strong economic growth creates a supportive backdrop for credit, but with spreads already at extreme lows, valuations appear somewhat expensive.
  • While low credit spreads makes corporate bonds susceptible to price declines on bad news, we are still moderately overweight lower quality vs higher quality as there is little yield and a lot of interest rate sensitivity in high quality bonds.

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.

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