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A look ahead: Third quarter 2023 outlook




A look ahead: Third quarter 2023 outlook

Interest rates and inflation outlook

A strong labor market, fueling solid consumer spending, has helped both economic growth and market optimism but in our view a slowdown and possible recession has most likely not been averted, just delayed.

Certainly, the combined rate hikes from central banks across the world are likely to be draining financial liquidity. And while the economic impact of this lags, we think it is a question of when, not if, the economy feels its full impact.

Ironically, a strong economy now increases the odds of recession down the road if it keeps inflation elevated due to several factors. Under that scenario, the Fed would raise rates higher, tightening financial conditions further, which in turn would raise the odds of a policy mistake and a recession.

Currently, the bond market is expecting rates will rise an additional 0.5%, and we agree. While we do think more rate hikes are risky insofar as they increase the chances of a policy mistake (which could lead to a recession and a quick policy reversal to begin cutting rates), we expect the Fed to deliver the hikes, nevertheless.

We expect the Fed will raise rates 0.25% in July, then another 0.25% in the fall.

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Capital Markets Perspective

Asset allocation views: Current outlook


Equity vs. Fixed Income

A handful of mega-cap growth technology stocks have largely driven performance in major U.S. stock indexes.

Naturally, this level of concentrated outperformance has led multiple market participants to tack toward near-term caution. Broadly speaking, we agree. A contraction in credit, soft manufacturing data, recessionary leading economic indicators, and mixed messaging from the housing market also present threats to the economic landscape.

We maintain a small overweight to equity, though slightly below the weights with which we began the year.




U.S. vs. Int’l.

We favor domestic over international in the intermediate-to-long term due to peak globalization and the increase in reshoring by U.S. companies, a higher degree of innovation domestically, greater demographic issues internationally, structural impediments to growth in Europe, and a more favorable climate for businesses (e.g. regulation) domestically.

In the near-term, the international vs. domestic outlook is less clear compared to three months ago, particularly in the Eurozone where the avoidance of severe recession last fall/winter resulted in what we believed was an excessive relative equity market return vs. the U.S. through March.


Market Cap

Large companies are generally outperforming smaller companies in 2023. This is consistent with typical late-cycle dynamics, where investors favor the relatively safer balance sheets and earnings growth of large firms as economic concerns take hold.

We currently believe that if the U.S. does experience a recession, it would be milder, which can provide an environment conducive for non-mega-cap companies to recapture some relative performance.

Given the elevated level of uncertainty around the economic outlook, we retain capacity to increase our small-mid exposure (likely via small caps) should sentiment fall, credit spreads widen, and the economy falls into a deeper recession.




We expect rate volatility to remain elevated as the Federal Reserve (Fed) nears the end of its aggressive rate hiking campaign.

We expect the Fed to stop raising rates in the third quarter and then to hold rates steady with rate cuts in 2024 as inflation slows along with the economy.

We expect longer-term rates to decline over time as concerns over slower economic growth and a possible recession increase. We also expect the Treasury curve to steepen as the market prices in a peak in Fed Funds and subsequent cuts.


Credit Quality3

In the second half of 2023, we expect credit markets to be increasingly driven by concerns over a slowing economy and the possibility of a recession due to tightening financial conditions and the lagged impact of higher interest rates.

Both investment-grade and high-yield corporate bond yields are below their long-term median and average. If the economy meaningfully slows credit spreads have downside due to rising default risk.

We are positioned moderately underweight credit risk within broad fixed-income portfolios as measured by spread duration. We favor high-quality fixed income such as investment-grade corporates versus lower quality fixed income.

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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While economic signals in the first half of the year were mixed, we continue to anticipate a soft landing, but are closely watching several factors like erosion of economic strength or changes in employment data.

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