The U.S. consumer ‘remains in a very strong place’: Strategist

Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Company, joins Yahoo Finance Live to discuss the current state of the consumer and why he's bullish on inflation.

Video transcript

DAVE BRIGGS: Let's break down today's market action with Brent Schutte, Northwestern Mutual Wealth Management chief investment officer. Nice to see you, sir. It's nice to see your notes, prior to this rally, say, fears of a recession are overblown. Why did you say that prior to this rally? We have heard a lot of gloom and doom recently.

BRENT SCHUTTE: Well, I mean, overall, the US consumer still remains in great shape. And so they came into these price hikes, disinflation, with cushion on their balance sheet. Certainly, employment is high. And so, the overall US consumer remains in a very strong place. I think the big fear was that inflation was going to continue to run away and cause the Fed to have to tighten the US economy into a recession. I think we're all starting to gradually wake up to the reality that goods spending, which was related to those Target and Walmart earnings that you mentioned, was pulled forward. Inventories have been rebuilt, and goods spending has caused the inflation that you're seeing.

That's going to roll over as people move towards service sector spending, which is the JetBlue and the Southwest that you mentioned. And so it may feel like a recession in some parts of the economy, but other parts of the economy are going to do well. Inflation is going to fall, and the Fed is going to go a bit easier. And all those fears that are involved in markets will start to alleviate and push the markets higher with the economy.

SEANA SMITH: So, Brian, you're pretty optimistic, and I like that. What should we be doing, then? For investors out there who are watching, should they be putting to money-- some money to work right now? And where exactly are you seeing the most opportunity?

BRENT SCHUTTE: Absolutely. I mean, I think we've seen the bottom. I mean, certainly the one thing that I always remind investors is to not panic when others do. And so, we did put out a paper today on my LinkedIn and my Twitter that shows that when sentiment is this negative, it's often, if not almost always, a contrarian indicator. And so, please, don't ever think this time is different. It may be unique. But you're not to sell when others do. That would be my point number one, and that is a point that should last forever in your investors' minds.

The second point would be that investors should not just focus on what's worked well in the past. And I've come on this show over and over and over again and talked about value stocks, talked about things other than technology stocks that we thought would do well this year. And that's certainly been the case. You want to invest in things that are cheaper. You want to invest in things that will benefit from where the economy is moving next. And so, we still like large cap value. We still like small cap stocks, quality small cap stocks. Those are the areas where valuations are, quite frankly, the cheapest and areas that we see leading us forward in the coming quarters.

RACHELLE AKUFFO: And it was interesting because the Congressional Budget Office predicts that inflation has peaked. With that in mind, then, how should people start to, perhaps, rotate some of their investments? And how should they view the ones that are, perhaps, less expensive, but not worth investing in versus those that do have the potential to rebound?

BRENT SCHUTTE: Yeah, I mean, I think the Congressional Budget Office is directionally right, but I think the inflation will come down quicker than what they imagine. I think the goods inflation is set to come down quite a bit as that spending eases, and that's going to be a big pull down on inflation.

As far as where to invest, I mean, I think investors get hung up on what worked well recently. And I think that's a forever thing. And so, yes, the market is down. The parts of the market that are down the most, I call it hopes, dreams, themes, and meme stocks. Think unprofitable tech stocks where people fancied what the future may be. You want to continue to invest in the here and now and things that are cheap.

And I guess one more market that I would add that I think people are overly pessimistic about is international stocks. They haven't worked well for much of the past decade. But I think the future looks brighter there, even though there is a war happening in the Ukraine and Russia that is certainly putting that economy at risk. My point is that it's already priced in. And so, investors should remain diversified. And they should tilt their portfolios towards things that are cheapest.

DAVE BRIGGS: Refreshing positivity, indeed, but you did mention inflation there. And given what we're seeing record after record at the pump, do you see any indication that inflation has peaked?

BRENT SCHUTTE: It has peaked overall. Certainly, food and energy may remain elevated. Commodity prices are certainly high. We do recommend that investors own commodities also. I guess I should throw that in there. But overall, the majority of inflation will begin falling. That's going to show up in the core numbers. The overall inflation may remain high, but the Fed can't do much about food and energy.

And so, this is where, I think, the Fed can be just a bit easier than the worst expectations that are priced into the market. And certainly, that's still having an impact on many consumers. But I remind you again that the consumer is in good shape, and consumers across the wage spectrum have received fairly substantial pay increases this year that will help them absorb those. As time goes, if prices remain high, that certainly will continue to erode that, but we're not near that level yet.

SEANA SMITH: Brent, one sector we haven't talked about yet is housing. And certainly, it looks like we are seeing a housing-- or a slowdown when it comes to housing, new home sales falling just about 16% to 17% last month. What's your read on housing? And I guess, is there this risk that we could see a bubble forming in housing and that it could potentially pop?

BRENT SCHUTTE: Yeah, I think housing prices have to slow. When rates rise, people afford houses off monthly payments. When rates rise, the end value that you can buy with a similar monthly payment falls, which means that home prices will fall likely. Now the other side of the equation there is that we certainly have a lack of supply. And so, I don't think we're anywhere near where we were in 2006, where people afforded homes based upon income that was, quite frankly, made up. That's not the case.

The consumer is in a good position right now and actually has the ability to afford these homes and haven't stretched as much as they did back then. But certainly, housing is going to cool a bit, which is OK. That's what we're trying to do here. But there are plenty parts of the economy that will continue to push us forward. And that's what I believe. As you look at the economy as an entirety, it will push higher as people return to public life.

RACHELLE AKUFFO: And speaking of public life, I mean, we're seeing a lot of people now subject to layoffs especially in the tech sector. How concerning is that? And what does that tell us about, perhaps, some of the moves that we're seeing in the tech sector, and how that might, perhaps, go into their earnings in future quarters?

BRENT SCHUTTE: Yeah, I guess, it's a bit odd I come out here with the positive outlook, and I talk about all the things that are slowing down overall. Certainly, I think what's going to happen is there's going to be jobs that are going to need to be transferred to other parts of the economy. And so, one of the big fears that is out there is that there is a lack of labor market slack. And that certainly has been evident. I still think we have people to bring back in.

So in order to be unemployed, as a reminder, you have to be looking for a job. What you've seen recently is that people are coming back into the labor market. And I think you're going to see some people transferred from other parts of the labor market that maybe don't do as well in the future towards other parts. That could cause some issues for individuals, obviously. But as a whole, that reallocation towards places where they're needed in the future would be a good thing.

RACHELLE AKUFFO: All right, we do thank you for your insights there. Brent Schutte there, Northwestern Mutual Wealth Management Company chief investment officer. Thank you so much.