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Markets: ‘You’re getting closer to a bottom,’ strategist says

Northwestern Mutual Wealth Management Company CIO Brent Schutte joins Yahoo Finance Live to track the performances of tech and energy stocks alongside market movements, volatility amid inflation and the Fed's interest rate hike, and comparisons to past economic environments.

Video transcript

DAVE BRIGGS: Jared pointed out some big losses. In particular, Amazon, Tesla, and Nvidia driving the NASDAQ way down, 300 points at this point. What's driving it so far down?

BRENT SCHUTTE: Yeah, I mean, this is the more expensive part of the market that we've been talking about where you want to be in things that are less expensive. And so over the past few years, you've had speculation in markets. You've had the stay-at-home trade be of benefit, which has benefited a lot of technology stocks. And now the economy has shifted. And it's moving back towards services.

And so, as you continue to move along, as we continue to figure out what inflation is, I do think investors want to be where there's a margin of safety on expectations because earnings will be coming down. And that continues to mean investing in things that are cheaper like US small cap, the S&P 600, like US value stocks, and things that, quite frankly, didn't do very well during COVID, as we shifted the economy towards goods spending over services spending, which is, as I mentioned, now reversing.

RACHELLE AKUFFO: Well, as we look at some of these big tech stocks, are they closer to getting a more accurate picture in terms of value? Or are they still overvalued at this point?

BRENT SCHUTTE: Yeah, I mean, certainly, when they fall as much as they have-- and this is where the market's been punished the most especially in the unprofitable tech stocks. So I call them hopes, dreams, themes, and meme stocks. You mentioned one of the ETFs that owns a lot of those. This part of the market has been essentially kind of wrung out. And so you've seen speculation come out of the market. You've seen parts of the market down 70% to 80%. And this, to me, is a good sign that you're getting closer to a bottom.

Certainly, it's spread more broadly, which typically happens towards the end. Things that were previously kind of untouched, like energy, has actually pulled back despite today's move. And so I think you're getting closer to a bottom. And I think going forward, for the near term, you still want to be in things that are cheaper, because we are likely to have earnings revisions to the downside. And those are areas of the market that have a margin of safety.

So small caps traded at 11 times expected earnings. Those expected earnings are probably not going to happen. But even if you cut them 20% to 30%, they're still historically cheap. So that's where I'd focus for right now. Certainly, if you want to start nibbling, I'm not against that. But in the meantime, I'd rather focus on the areas that we think are attractive in the here and now.

SEANA SMITH: Hey, Brian, we got that worrisome data point out this morning. Consumer confidence falling to its lowest level that we've seen in almost a decade. We talk about the fact that inflation is hurting every single American. But from you, from a markets perspective, does this make you a little bit more concerned maybe about some of the volatility that we could see in the short-term?

BRENT SCHUTTE: Certainly, I think there's going to be volatility around every inflation print. And tomorrow, we have a big one in PCE. So I remind people-- everybody talks about CPI. The Fed does not look at CPI as their primary inflation indicator. Tomorrow morning, you will see PCE, which is their primary indicator. And that's probably why you're seeing some volatility because we won't get the market to settle down until you see inflation start moving demonstrably lower.

And so that's more of the key. I mean, look, sentiment is bad. There's no doubt. The economy is going to weaken. I think that's important. But the most important question, the most-- and the biggest fear that's out there is, how far will the Fed have to hike rates? How much demand will they have to destroy before you get inflation to move lower? And that's where I think there's good news.

Everybody points to the 1970s. That's coming back into the market. What happened in the '70s is the Fed hiked rates, demand was destroyed, but wages and inflation didn't move lower. I don't think you're anywhere near the 1970s. I do think wages will begin to move lower. I think expectations are much, much lower. And I think you're going to see inflation roll over, which means the Federal Reserve won't have to do what they did in the '70s. And even if we have a recession, I think it'd be mild. And it's largely already priced in.

DAVE BRIGGS: On that question, Jared Blikre left us with the ARK Innovation stocks. And speaking of, Cathie Wood said we're already in a recession at the moment. What do you think of that sentiment?

BRENT SCHUTTE: You know, I don't know for certain. And this is where the definition of recession gets a little bit squishy. I mean, certainly we had negative growth in the first quarter. It was caused by inventory rebuilding, which is kind of leading to what I'm mentioning now, where there's-- inventories were built on the good side against lower spending there and shifting away from that. Perhaps we have a recession. I think there's a high probability that we do actually have one in the not too distant future.

But again, from the market perspective, it's what is priced in and how far does the Fed have to go. There are fears that are out there that the Federal Reserve will have to hike rates much, much more than what is currently priced in. There are fears that they have to go to 6%, 7%, 8% because as demand is destroyed, inflation doesn't come down. I don't believe that's the case. The key difference between now and then is wages. Wages back in the '70s were 6% to 9% every year, no matter what happened. We've had one year of above average wages.

There's reasons for that. I think they're coming down. And as evidence of that, in the consumer sentiment reports, there is a question where they ask you what you think your income expectations are one year from now. Those were 6% to 9% back in the '70s and '80s. They were 1.1% in the University of Michigan. And so I do think you're going to have that come back down. Certainly, a recession is an important question, but I think the more important question is, just how far does the Fed have to go? And that's where I think there's good news.

RACHELLE AKUFFO: And obviously, a lot of people trying to predict what's going to happen next. In terms of what happens with slower economic growth, what does that mean in terms of repricing?

BRENT SCHUTTE: Yeah, I mean, certainly slower economic growth means that stocks probably don't do as well as they did in the past year. I mean, I think that's probably-- or I should say, the past couple of years. I mean, I think you should expect stock prices to be more behaved in the future. I don't think you're looking at 20%, 30%, 40% upside. But I do think there's a positive impetus from here. I think there are certainly parts of the market that are cheap. You want to, as I mentioned before, kind of move towards those.

And I think I've said on this show before, when the opening to the show talks about things other than technology stocks, that's when I think you have the all clear to buy. And it's almost a contrarian indicator that every time I go on a TV show, they want to talk about tech stocks. When those aren't as important anymore, I'll probably be a little bit more positive towards those areas of the market.

SEANA SMITH: All right, sounds like we're gonna have to wait a little while until that becomes true. But Brent, real quick, Fed policy. You mentioned that a couple of times here in the past few minutes. A lot of that has to do with inflation, what we're seeing reflected in the economic data. But in terms of expectations, more and more likely that we could see 50 to 75 basis point hike at the next meeting. Looking further out, though, into the fall, what do you think is the appropriate Fed policy at this point?

BRENT SCHUTTE: I hate to say it because the Fed says-- and this is why the Fed is different than those of the past. The Fed is going to watch incoming data and react more. I mean, I think we all forgot that the Fed said that 75 basis points was off the table at their meeting before the last meeting, and that 50 basis points is more likely. And then they actually pivoted because they saw inflation expectations rise. And they leaked it to the media that they're likely to do 75, and then they did.

Look, I think 75 is probably more likely, unless you get some really bad-- like, you get a jobs data next week that's really bad. I think 75-- I think the Fed is going to get to neutral, what they think is neutral. And then they're going to stop for a while and see what happens. And so I think it's more, you've seen a lot of Fed fears. I think they're priced into the market. And I think we probably top out somewhere around 3% of the Fed funds rate. And then I think we start moving lower in the not too distant future.

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