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'The economy has adapted' to COVID-19: Investment Strategist

Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management Company, joins Yahoo Finance's Zack Guzman to discuss the U.S. economic outlook as stimulus talks drag on.

Video Transcript

ZACK GUZMAN: Brent, we're going to be having a medical discussion in a bit, so I don't know want to put you on the spot or ask you about those elements there, whether the president is immune. But he does speak to a larger economic question here because the data has shown that Americans are kind of hesitant to spend on certain things through this, mainly travel.

We've seen hotel, airline stocks, casino stocks still way down in this recovery. So regardless of what the president says about getting back out there, there's still-- there's still demand shock that investors need to be cognizant of here, right?

BRENT SCHUTTE: Yeah, but-- but I guess, you know, the one thing I will say is that the economy has adapted. And so if you think about what I'm doing today, I'm actually sitting in my basement and not in an office. And so if you think about it, many companies have actually figured out how to serve their clients in a COVID-influenced economy. You've had the fiscal stimulus come in, which is kind of driving the [? backs ?] in force. And if you look at spending, it has shifted.

And so last week, we had PCE consumption come out and goods. Think durables, think housing, think big picture purchases. Non-durables, think groceries. They have actually gained during this, while services, those parts of the economy that you mentioned, are still the ones that are somewhat offline. They're down. But overall, the nominal spending in the US economy is only 3% lower than what it was in February. And so you've had this shifting of spending, you've had economy that has adapted, and that is lessening the impact that COVID is having.

So once upon a day, it impacted all of us. We had that huge growth downturn in the-- in the first and second quarter. Estimated growth in third quarter right now, according to the Atlanta Fed, is 34.6% quarter over quarter at an annualized pace. Now if that were to occur, that would leave the US economy only 3% smaller than what it was in February. And so that's why you've had this positive backdrop as much as anything else.

ZACK GUZMAN: Yeah, I'd say that's true. I mean, but when we think about other market watchers out there, mainly in the big firms, we've seen a lot of them cutting their Q4 growth forecasts because of the stalling stimulus talks here and what could happen in terms of upticks on the coronavirus front. I mean, we've seen that drag on.

Stimulus talks remain active, but hope remains low when you consider the trillions in-- in the gap between Democrats at 2.2 trillion in their latest offer here and Republicans closer to 1 trillion, depending on what Secretary Mnuchin can get Senate support for here, but even that looks shaky. So how does that change, as you're talking about kind of sectors recovering through this and how we've seen different paths here in 2020 for a lot of those businesses, how does it change your investment strategy at all when you think about what could happen if maybe a deal on that front comes through?

BRENT SCHUTTE: So, look, I-- this is not a comment on whether or not I think stimulus needs to be done or not, but one on what I think the impact of the market will be. So you've pulled a lot of people across the economic value that COVID caused, so the stimulus that actually occurred was necessary. We had, I think, 17 million additional people become unemployed. Now, 11 million people are back on payrolls, and so the impact is lessening.

I would like to actually have it occur to pull the rest of the people across that valley. But if it doesn't, I don't think it's a deal breaker for the market because I do think you are seeing the economy adapt. You are seeing companies figure out how to operate in a COVID-influenced economy. And hopefully at some point, we do get a vaccine, which will, you know, kind of completely lessen the impact hopefully, or at least even more so, and you're going to see earnings growth broaden out.

I mean, in the third quarter, you will see earnings grow, and you're going to see them broaden out. So there's only been one game in town or a couple of games in town recently because of what happened in the first quarter. That was technology stocks. You're going to start seeing earnings grow across more of the industries just because of the economy coming back online and the economy adapting to the COVID.

ZACK GUZMAN: You know, we've heard a few guests on the show talking about that too in terms that rotation maybe over back to the value side of the market. But when we talk about the president, I'm sure you would agree, I mean, we've talked about how that stimulus bill coming through here would be a plus in terms of boosting the economy.

As you said, maybe if it doesn't come through, maybe not all that terrible when you think about how this recovery has been going on. It certainly might not help it speed up here. But when you talk about the president, that's going to be a big question answered in November, I suppose hopefully, about who will be president moving forward. As we're getting new polling data, a late CNN poll showed that Joe Biden has continued his lead here with 75% of likely voters backing him to just 41% of President Trump in a nationwide poll.

Of course, these things don't really matter when you think about the nationwide polling versus some key battleground states. But even there, Joe Biden seems to have a significant lead in some of those states. But when you look at that big question mark, how do you-- how do you position around that since that does seem to be not even who wins, but also the question of whether or not you get a peaceful transition of power that's hanging over a lot of investors' minds?

BRENT SCHUTTE: Sure. So I think some of the-- the polling that you mentioned probably drove investors to believe this week-- and maybe that's some of the positive market action-- that there-- the likelihood of a contested election, which was probably the most disruption, has gone down somewhat. Now, we'll see what actually happens as we push further. Certainly, there's still a month left, and a lot of things can change in a month. But that at least now has probably taken off some of that contested election that people have been playing for and pricing in.

I do think that if you did get a Democratic sweep, there would be a knee-jerk reaction because it would mean higher taxes on companies and individuals, which does have an impact on earnings. But I-- I want to really, really point out again and bring this back, investors should not overplay politics in their portfolio positioning. The US economy is large. It has a natural trend rate of growth that is, quite frankly, hard for any administration to dislodge.

They can actually take some of that natural trend rate of growth and shift it around a bit, but they can't, to my estimation, eliminate it. And if I take you back and I look at the economy, and I go back to 1960 and I look at elections, where the economy is in its economic cycle is more important than who was president, in my estimation. So if you inherited an economy late in an economic cycle, the average return over your four years is something like 6.7%.

And by late in the cycle, I mean the Fed is usually raising rates, the economy is growing too fast, inflation is ticking up. Mid-cycle, if I do them by that, meaning that the economy has recovered some of its losses and it's moving towards being, quite frankly, late cycle, the return is 10%. Early cycle, if you inherit an economy right after an election, the returns are-- I'm sorry, if you inherit an economy right after a recession, the returns are much higher. I believe the average is around 14%.

And so I guess the good news is, is that either one of these presidents, whoever gets elected, will inherit an economy that still has slack left. And one big key thing that is very important to markets, they're going to inherit a Federal Reserve that wants to do no harm, wants to backstop markets, and isn't raising rates anytime soon, which is a very, very important conversation.

ZACK GUZMAN: Yeah, and you got Fed Chair Jerome Powell out today. Some people were pointing to his comments and maybe how that had stocks under pressure here when he warned of-- of another-- you know, comments we've heard from him many times before talking about a weak recovery without sufficient government aid on the fiscal side, which, again, as we just talked about, still remains in limbo.

But lastly, I mean, when you think about that, it-- it sounds like you're saying the election, you know, is-- is kind of being overhyped and overtalked about in terms of your impact looking at 2021 on-- on earnings and-- and how this recovery goes from there. But in terms of how you trade it around right now-- and I know short term doesn't really get a lot of people who come on here very excited when I put them on the spot for that, but we've had a few guests saying that the technical levels to watch here on the S&P is around 3,363 in terms of closing above that.

We did that now, which has some people, mainly Tom Lee, a guest on the show, saying that we're out of the woods in terms of putting new money to work here. Is that your take as well, that-- that, I guess, if-- if the election isn't so big of an issue, now that we've seemingly almost moved past that volatility, that we're good to go here?

BRENT SCHUTTE: Yeah, I-- I'm not suggesting that there won't be a knee-jerk reaction. So I-- I do think that if you did get a Democratic sweep, the market wouldn't like that. Now this is not a value statement on right or wrong, it's what I think the market will do. The market would have, I think, a knee-jerk reaction, but I-- I don't think that would be long-lived. I mean, there are other offsetting positives that would come along with that.

I-- I guess to me, where an administration can impact is sectors, industries, and companies that are more favored by their policies. That's where they can take and shift some of that natural trend rate of growth towards, and that's something that we'll be paying attention to as we move closer to the election. But from a big overall standpoint, I'll leave Tom Lee to talk about the short term. I'll talk about the intermediate term.

I still think stocks are going higher over the next year. I think the different-- there'll be different leadership, the value stocks that we've talked about, small cap stocks, things that are more economically sensitive. And I guess one thing that isn't going to change also besides the Fed is that neither one of these parties are talking about spending less money. They're both talking about spending more money, and that can help drive stocks higher until the bond market has a fit--

ZACK GUZMAN: Right.

BRENT SCHUTTE: --which certainly isn't happening any time soon.

ZACK GUZMAN: Yeah, just a matter of how much more money, I guess, is really what's being discussed right now, but you raise good points there. And-- and you and Tom Lee are on the same page about what it could look like over the long term, so we'll leave that there. But, Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company, always appreciate you coming on.

BRENT SCHUTTE: Thank you for having me.