(Branstad): Hi, everyone. Thank you for joining us today for Thrivent Asset Management's fourth quarter market outlook. I'm Jeff Branstad, portfolio manager of the model portfolios here at Thrivent. And I'm joined today by Steve Lowe, our chief investment strategist, Kent White, our head of fixed income and David Spangler, our head of mixed assets.

(Branstad): Kent, what's your outlook on the economy? Do you feel it's strengthening? Weakening?

(White): It appears we've entered what I would consider a soft patch in the economy right now, with below trend growth, likely driven by a tariff and trade policy uncertainty. The August jobs report reinforced this view with only 22,000 jobs being created, which was much lower than estimated. But we're not losing jobs either. At least not yet. The labor market, in my view, remains the key downside risk.

So, it seems that companies just don't appear willing to hire until there's greater certainty around the impacts of trade policy. It's also possible it's a supply driven shock caused by immigration restrictions. By the way, companies would like to hire, but the supply of workers isn't there. Either way, it's important that the economy is not shedding jobs, as that would create a negative feedback loop between spending and employment.

(Lowe): Yeah, it's kind of an odd labor market because you have supply constraints, because the labor force is actually down a bit. In other words, unemployment rates is low if there's less supply because if you're not looking for work, you can't be unemployed.

(White): Right. It might be masking some weakness in the labor.

(Lowe): Exactly.

(Branstad): We've seen some easing in inflation, but it remains sticky. Kent, what are your expectations for inflation?

(White): So, inflation has been a major concern for consumers for quite some time now. It's also been a major focus for the markets over concerns about how the administration's new tariffs might impact prices. Inflation, as measured by the core PCE, had been trending back towards the Fed's 2% target, but has been stuck just below 3% for most of 2025. I think until we get through the majority of the tariff implementation, goods inflation is likely to remain elevated.

And, I'm also a little concerned the market may be underestimating both the duration and the level of the potential tariff impacts. So, we'll see where that goes. We're also likely to have a more dovish Fed next year. That is likely to be not as concerned about inflation and more about growth. So that's also something we need to keep an eye on.

(Branstad): Steve, what happens if inflation just stays more persistent than expected?

(Lowe): I think higher inflation is likely to cause the Fed to slow rate cuts and possibly even pause them. It would take a really large surge of inflation for the Fed to start, you know, considering hikes. I think if inflation continues to move up, markets would struggle as expectations for interest rates would rise and rates likely would rise, and that would dampen the economy.

(Branstad): All right. What if it goes the other direction and inflation eases back towards the Fed's target?

(Lowe): Yeah I think it'd be very welcome by markets. And that would really in particular help the housing market, which has been slower than normal, and would likely boost the economy because funding costs are lower. And the other aspect of it, which the administration would like is it would lower the cost of U.S. debt, which is quite high right now as interest rates are low, and it would give them better financing rates.

(Branstad): Kent, what are you expecting from the Fed then?

(White): After the weak August employment report, a rate cut at the September 17th meeting is widely anticipated by both Thrivent and the markets. Beyond that, I think the Fed is likely to cut 1 or 2 more times before year end. How the employment situation evolves is likely to be the deciding factor in whether it's 1 or 2. Fed Chair Powell clearly signaled at Jackson Hole that the Fed is much more focused on the employment side of the dual mandate, which has definitely been weak recently.

And just as a reminder that the Fed's dual mandate is one, inflation and two, employment. So, they're shifting a little bit more of their attention away from inflation to the employment side due to the weakness that we've seen in the labor markets. This would seem to indicate that the Fed has slightly more tolerance for above target inflation, likely because it views a pickup in inflation driven by tariffs as somewhat temporary.

And the Fed also believes that their policy rate is still somewhat restrictive and there's a desire to get it closer to neutral. So, a few insurance cuts to recalibrate the rates shouldn't be viewed negatively.

(Branstad): David, how do you think the equity markets are going to react to a cutting cycle?

(Spangler): Well, it depends what kind of a cutting cycle we get. Whether I think it's a cut of 25 basis points every meeting or a meeting, then a pause and then another cut in a meeting. As long as we're on a rate-cutting cycle, I think the equity markets generally will react positively to that.

(Branstad): Another scenario that we haven't really touched on yet though is what if the Fed goes straight back to holding on rates and no more cuts.

(Spangler): That would be not good. I think that that would be a surprise to the markets, like a large surprise to the markets.

(Branstad): Steve, the Fed has been under pressure to cut rates from the administration, which is also looking to change the composition of the Fed. Could you kind of talk us through that thought process there and what impact that might have.

(Lowe): The administrations had been very clear that they want the Fed to lower rates. You know, to boost the economy, help the housing market, you know, help U.S. debt costs. And toward that end, they would like to change the composition of the Fed to lean more dovishly, you know, meaning people who want to cut rates.

(Branstad): What does the market think about all this pressure?

(Lowe): Well, they're concerned about an erosion of Fed independence. You know, why does that matter? Because a more political Fed is much more likely to keep rates lower to boost the economy, which would send inflation higher and ultimately damage the economy in the long run. And you can see this as countries with less independent central banks have higher inflation. It's a pretty good correlation there. And the reason is that they set rates too low. And concern over Fed independence is also kind of showing up in assets that fare better in an inflationary environment. You can see gold—gold is up. Commodities are up in value stocks which typically do well in an inflationary environment. They're all higher.

(Spangler): Yeah. And additionally, dollar erosion, I think is a significant risk in that kind of a scenario. So near term, depreciation of the dollar could be beneficial to on-shoring to manufacturing. But I think longer term, in a scenario we were just talking about here, dollar erosion would result in a lack of confidence in the dollars of reserve currency.

So, again, to your point, Steve, commodities, gold, other assets would appreciate, as the dollar depreciates, but it can become a negative outcome as a result.

(Branstad): So, in addition to the kind of concerns over a politicized Fed, we've also seen the head of the Bureau of Labor Statistics get fired recently. Are you concerned about political organization of economic data itself?

(Lowe): I mean, the firing is concerning as markets need, you know, reliable, accurate economic data to price assets. It's absolutely necessary. You know, I don't expect the data to be manipulated. But it is somewhat of a concern. And if it is politicized, it would create a lot more volatility and raise the cost of capital. You can look at countries where the government kind of controls the debt or influences it. They have a higher cost of capital, which influences markets across the board.

(Branstad): Kent, what are your expectations for interest rates then?

(White): So, given our views and our thoughts on a Fed that is likely to continue to cut rates in the year end, we think there's likely continue to be some downward pressure on interest rates. A lot of this is already priced in with a two-year Treasury rate currently at its lowest level since 2022, but there's probably still some room to go there. And until we see some evidence the economy is beginning to reaccelerate and we see the job market begin to add jobs again, the path for rates is likely to continue to remain lower.

(Branstad): So, what do you expect the Treasury curve to do then?

(White): Investors have been gravitating towards the front end, anticipating rate cuts by the Fed, which has steepened the yield curve. And a steeper yield curve means that short-dated U.S. Treasury yields have been declining more so than long-dated yields like the 30 year. The steepening is likely to persist if we're correct, and the Fed continues to cut rates, as short-term yields typically follow the Fed funds rate.

A lot of the movement in the steepening has been Fed-driven just as a signal that they're going to be cutting rates. So, we've seen that a steeper curve, mostly from the front end. The back end has been fairly sticky and somewhat better behaved than it is in some of the other countries in Europe and Japan.

So, what we really need to watch here is kind of what the U.S. Treasury is going to do, how they're going to fund all the fiscal deficit. And it's right now it sounds like they're going to be issuing a lot more on the front end. So, they don't want to crowd out the 30-year part of the curve in there.

They haven't announced it yet, but the market's anticipating that they'll be really careful about how much debt they issue in the 10- to 30-year part of the curve, because if they plan to issue a lot more, that would steepen the curve even more.

(Branstad): Credit markets like investment grade and high yield bonds have performed pretty well, but they kind of seem like they're just “priced for perfection”. What's your outlook on those markets?

(White): You're right. Credit markets have been performing very well this year and especially given some of the risks that we've been talking about. They do seem “priced for perfection” or very little risk is being priced in. So, credit spreads or the additional yield over U.S. Treasuries for investment grade credit are currently at the lowest levels in over 27 years. And high yield spreads are also not too far off their lowest levels. So, it's not just in corporate credit. We're seeing this across almost every fixed income asset class and sector. So, it really gets back to this insatiable demand for yield.

People have been buying yield instead of spread. I think we do need to be a little bit more careful, especially if the economy is potentially at a, like a weaker turning point. Potentially. Make sure you're getting compensated for that because you're not getting really compensated for a lot of the risks that are out there.

So, we're not anticipating a spread widening event, but we are expecting volatility to pick up a little bit this fall. And on the other hand, you know, corporate balance sheets are in really good shape. Fundamentals are good. We are seeing some offset to that with we're seeing a lot more M&A that's really picked up since during 2025. We expect that to continue. So that could put a little bit of pressure on corporate balance sheets. But overall, we're not concerned about the health of corporate or corporate issuers.

(Branstad): David, it's been a bit of a volatile year in equity markets. What do you expect for the rest of the year?

(Spangler): Well, it's always hard to predict the unknown unknowns. One tweet, one change in policy can really rattle the markets. Interesting, though, is that really the volatility was early in the year and it was kind of in a compressed time frame. I think that if you did see any volatility, due to seasonality in general in September and October, it might be an opportunity to buy into the markets at that point.

(Lowe): Do you get concerned when volatility is very low for a long period of time? Other words like given a trigger, is it going to pop or not?

(Spangler): Again, you don't know what the catalyst might be. Yeah. Where I think the risk is in that scenario, Steve, is that, when something does happen, it can be much more severe reaction to the downside. But it doesn't mean that there's going to be a trigger.

(Branstad): We've talked a lot in over the last year or two, really, about the narrow breadth of the market. David, do you are you still concerned over that? What are your expectations going forward on on kind of breadth and concentration?

(Spangler): Yes. The market is pretty concentrated, historically speaking. And one should be concerned when something is unusual, and it is unusual to be this narrow for this length of time. It doesn't necessarily mean, though, that again, that anything is impending or about to happen.

Today, large-cap tech and the areas of the markets that are highly concentrated are very well supported in terms of their free cash flows, their earnings are earnings growth. They're very low debt. They are very high quality. And so at this point, you know, if you look at it from a valuation standpoint back in history, more concentrated markets were highly valued.

Now is it really highly valued? Well, they're supported by their earnings growth. And so I would say moderately overvalued at this point.

(Branstad): One area of the equity markets that has seen some better relative performance than it had in quite a while is small-caps. Was that fundamentally driven or was that simply just riding the wave of a risk-on market?

(Spangler): I think it can be both. Which is to say that more recently small-caps have had better earnings. In fact, in the second quarter, they had some of the best earnings growth they've had for a long period of time. On the other hand, it still significantly lags large-caps and I think will probably persist, into the future.

(Branstad): International markets was another bright spot for equities, especially in the, at least at the beginning of the year. Is that possible for that to continue?

(Spangler): Yeah, that's kind of a complicated question. And that is two parts. One is fundamentally and economically whether international can perform better over the intermediate longer term. And then relative to the U.S. I think in that on that count, likely not. Which is to say that the large-cap or the international performance that we saw that was, supported earlier in the year was really through about mid-March, and that was about it. Now, since that period, international has underperformed both in rich markets and developed.

(Branstad): And it sounds like you still prefer domestic over international.

(Spangler): So, longer term we think that international is structurally challenged, a whole variety of reasons, from demographics to a lack of productivity, taxation and otherwise, and that they aren't likely to have the type of fiscal stimulus and policies that the United States has in place to be able to spur their economic growth.

(Branstad): Let's talk a bit here about what's all worrying you guys. David, why don't you start what are you most worried about right now?

(Spangler): Come to the end of the month, we have a budget that we have to pass in order to fund the government. The debt ceiling itself won't be an issue. There could always be further meddling in terms of the Fed. That would be an issue that we would want to keep an eye on. And whether we get a hawkish type of Fed rate cut, in terms of language, for further rate cuts.

We'd also want to keep our eye on the, you know, sort of the rapid, deteriorating labor force. We don't think that's what's in the cards. We don't believe that that's going to happen. And other than that, there's always the geopolitical and turmoil from tariffs that could pop back up again.

(Branstad): How about you, Kent?

(White): Being a bond guy, we usually have a pretty long list of things that we worry about. Either the labor market or inflation end up worse than we're all expecting, or the market is expecting. Either one of these outcomes would likely be negative for most markets.

I'd also agree that Fed independence is a major risk factor, especially for the bond markets.

And then finally, we mentioned earlier on credit, valuations across nearly every asset class, and not just in credit. You know you know maybe it's equities too that valuations seem to be a little bit stretched. So those are probably the primary ones that I'd be most worried about.

(Branstad): Steve, you got anything more? We've got a pretty long list going on already.

(Lowe): Well, erosion of Fed independence is up there. That's a concern. But also that artificial intelligence will not fulfill high expectations. You know, the leaders in particular will not able to monetize it to the extent that the market expects. I think that's a key risk for markets. And then also, breadth is narrow and that doesn't really matter in the short term or intermediate. But if you look out over 10 years or so when markets are very concentrated and forward returns are usually not that great.

(Branstad): All right. Well, let's let's try and have some positive points here as well. David, anything, that you see, that could possibly be go right? That could be better than expected?

(Spangler): Certainly, it could be a dovish rate cut and a rate cutting cycle that the market expects, or even more than the market expects would be positive for the markets. Employment remaining stable. And fiscal stimulus and deregulation, those economic supports that are coming in at the end of the year and into 2026. I think all taken all together, could be relatively positive for the markets.

(Branstad): Kent, you got anything positive?

(White): You know, really just I think the market and myself too have been kind of underestimating just how resilient the U.S. economy can be and how resilient the consumer has been. So that would be another thing that we need to continue to go right.

(Branstad): Let's finish by going around the table through our mixed asset positioning. Steve, why don't you start and give us kind of a broad overview of how you're positioned?

(Lowe): We're still moderately overweight equities and somewhat underweight fixed income versus our our peers. You know, so we're fairly close to home, but I have a positive view of the market. And there's, you know, some concern particularly over the labor market and a slowing economy. But we're still, you know, kind of our, our base, you know, moderately overweight equities.

(Branstad): David, how about within equities?

(Spangler): So, our positioning is relatively similar as it has been for a lot of the year. What we have been doing as Steve mentioned is that we're overweight overall risk assets. We're overweight equities. Within equities, we're a little underweight in public equities. But then combined with private equity we're adding a little bit above our long term strategic, positioning, which is a little overweight or overweight to our to our benchmarks.

What we have been doing over the course of this rally that we've had since April and into May and forward, is that as the markets have been strengthening, we've been selling public equity into that strength to maintain our targets of moderately overweight public equity. That's the main thing that we've been doing throughout the period of this year.

Within asset classes. We are a little, we're overweight, large-cap or overweight large-cap tech. We're overweight a little in mid-caps. We're underweight in small-cap and public. And then overall domestic, we're overweight and we're overweight relative to international predominantly in developed. So developed is where we're underweight or underweight in Europe. We're underweight in UK, probably about even in Japan. But overall it's developed where we're underweight.

(Branstad): Okay. Kent, how about fixed income side?

(White): We're still pretty up in quality across most of our funds. And what that looks like, we're a little bit underweight corporate credit and overweight things like U.S. Treasuries, mortgage-backed securities, which is one of the few fixed income asset classes that isn't at its like historical heights. So we see some value there.

We're also up in quality in terms of credit ratings within our corporate portfolios. It just gets back to valuations right now. There's not a lot of excess credit spread or yield, in corporates right now. And it won't take much spread widening for that incremental yield to evaporate if we do get into a softer environment.

So just across the board, just being really cautious about where we put our money and, you know, really relying on our research teams to find Alpha where we can, where there is some, and that's one of the things that we kind of pride ourselves on is just a solid research team and able to pick those spots.

(Branstad): Steve, Kent, David, thank you guys so much for sharing your insights and thoughts and perspectives today. And thank you all for joining us today as well. We hope to see you again soon. Goodbye.