Northwestern Mutual Wealth Management Company CIO Brent Schutte breaks down the most recent housing and economic data, inflation, market sell-offs, the Fed's rate hikes, and value stocks amid volatility.
- All right, thanks, Michelle. Let's get you up to speed now on the continually cooling housing sector as mortgage rates go up, mortgage demand continues to go down. Mortgage demand dropped 1.2% last week. That's according to the Mortgage Bankers Association. Demand has now fallen by nearly a third since last year, pushing it down. Of course, mortgage rates now on the 30-year fixed up to above 6%. That's the first time since 2008 we've seen that mark come home. Almost double what it was a year ago, as well.
Demand for refis also fell another 4% from a week ago and is now-- listen to this-- 83% lower than it was one year ago. This all on the heels of yesterday's inflation print that showed shelter inflation increasing more than made up for the drop in gas prices. And what you're seeing is really, I think, frightening. You're seeing developers walk away from deals, guys. You're seeing project stalling mid process.
People I'm speaking to are very surprised at how this housing sector and real estate as a whole is cooling a lot faster than they thought and now you're hearing whispers of a potential housing crisis. Let's hope not. Let's bring in now Brett Schutte, Northwestern Mutual Wealth Management Chief Investment Officer. Brett, let's still talk a little bit about what we saw over the last 24 hours.
It was a tough CPI print, but we're talking about the seventh worst drop ever for the Dow, fifth worst for the S&P. Was it reciprocal, the market reaction?
BRENT SCHUTTE: Yeah, look, I mean, I think it was a big disappointment, largely because all the forward-looking data is pointing to lower inflation, but it didn't show up in the numbers. And so you opened with housing and how housing has cooled dramatically. One of the big areas in inflation that was up was the owner's equivalent rent, which is essentially housing. That reflects what happened 12 to 16 months ago with home prices and that's why that's elevated right now. That's backward-looking data. The forward-looking data, as you just mentioned, points to a better balance between supply and demand, which means lower prices.
And so I think that the disappointment was the number didn't show what people thought it was going to show, but I don't think it's a defeat. I think you're going to see lower inflation in the future, which will be good both for the economy and the markets. And I don't think we're going to have a housing crisis.
SEANA SMITH: Brett, when you take a look at the major averages today, the Dow, S&P is still lower, once again, coming off their worst days in quite some time. What would you say is the biggest downside risk for the market? Is it still all about inflation or something else on your radar?
BRENT SCHUTTE: Look, I've learned in the 27 years of doing this that if you cure what's wrong with the economy you cure what's wrong with the markets and inflation is that. And so certainly, that's the worry right now, that inflation remains elevated and the Federal Reserve has to keep hiking. I think the fear's shifting just a bit. I see the forward looking data. I think others do, too, and the question is, does the Fed feel comfortable enough in their credibility-- their inflation fighting credibility-- to even pause while the inflation data is high or do they have to keep going even though the forward data, I think, solidly points to lower inflation?
And that's the risk. The Fed keeps going even though they probably don't need to after they get done with the next rate hike or two. And so I think that's the fear. That's the risk. You mentioned it's the worst day that we've had. It's the worst day we've had since June 2020. I'm sure you all remember that. Probably not, right? And I don't think you'll remember this one either in the future.
- I mean, it's been a tough few years. It does feel like it's been a blur, especially for markets. But as you look at some of these calls that we're seeing, potentially for 100 basis point hike, are they jumping the gun? Are they the markets sort of moving a bit too much with sort of every bit of data point that comes out?
BRENT SCHUTTE: Yeah, I mean, that's why-- I think the markets move higher, but I think it's a grinding back and forth advance based upon what happens on every single data point, which is, as we know, volatile. It gets revised often. Certainly, the number yesterday is high. I don't think the Fed does 100 basis points. I think they do 75 basis points and then they start thinking about what's going to happen in November, which this Fed isn't prejudging, and there's certainly a lot of data between now and then. And so maybe we get Chair Powell starting to talk just a bit about risk becoming more two-sided, because despite that inflation number, you're seeing demand and supply balance and inflation expectations remain very well contained.
- Boy, it's nice to hear a little optimism. Brett, so let's talk about moving forward. Given all that backdrop, what's your strategy?
BRENT SCHUTTE: Yeah. So, I think the market has bottomed, I think, for a variety of reasons. So I think that June 16 low was the bottom. If I look back to the '60s and '70s when inflation was the economic problem, when inflation peaked, the market bottomed. I think that's the recipe still here, too, today. When you throw in market sentiment, which is awful right now-- technical term, awful-- which is a very powerful forward indicator, I think you move forward. I think stocks grind higher. We still like parts of the market are cheap.
I know you opened talking about technology stocks and that's certainly been popular for the past few years, but I think you need to look in stocks that are cheap and stocks that are more value oriented. You need a margin of safety against falling earnings expectations and higher yields, which I think are here to stay. And so we like value style within the S&P 500. We certainly like US Small Caps, as represented by the S&P 600. They traded about 12 or 13 times earnings versus their historical average of 19, 20 times, which means you have a margin of safety against falling earnings, which certainly could occur as the economy pushes closer to a recession.
SEANA SMITH: Brett, and let's talk a little bit more about those earnings because it's going to be here before we know it. When we talk about third quarter results, what are your expectations? Do you expect more revisions, lower here heading into the final quarter of the year?
BRENT SCHUTTE: I think it's logical to expect that and I think a lot of it has already occurred. Look, I know there's a fear that the earnings is the next shoe to drop, but if I take you back to '66 to '80, I mentioned that when CPI peaked the economy bottomed. What happened after that? Think about what CPI is. It's a pass through of cost to consumers. Earnings actually fell, but the market looked past that because inflation was rolling over. And so I suspect that you may have some consternation here. I don't think, like many strategists do, that that's the next shoe to drop.
I think some of that's already priced in. It certainly will cause more volatility and so I think investors need to brace for that, but I think stocks eventually move higher and I think the next earnings season will probably be a bit of a time period where you continue to mark down future earnings, but I still think we're going to get past it.
- So Brent, for retail investors who are looking at what's happening in the markets and sort of wanting to jump in and buy the dip, what is the long view you think they should be taking at this point?
BRENT SCHUTTE: Well, I think should certainly be buying the dip if you're looking at the longer term. I kind of half jokingly said, you remember June 2020. I don't think many people do. The market's higher than when it was then. And so I think if you look and you think about a longer term strategy, you certainly, if anything, don't want to be selling when anyone else is. I know we all talk about that, but the data would support it and I'd mentioned to people who are listening that they shouldn't be selling and should, in fact, thinking about being adding to their positions. There's also a desire right now to sell bonds because they haven't worked this year. They are now back to yield levels in which they will provide a hedge against equities. And so I guess to kind of close it out, the 60/40 portfolio that many people have is not dead. It certainly took a little bit of a bump, but it certainly is still valid going forward and I think will be in the future.
SEANA SMITH: Interesting. It's a contrast what we've heard from a couple of our guests here over the last couple of weeks. But Brent Schutte, always great to have you on the show. Thanks so much for joining us this afternoon.
BRENT SCHUTTE: Thank you.