Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, joins Yahoo Finance's Kristin Myers to break down the latest market action.
KRISTIN MYERS: Let's bring on Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. Brent, good to see you again. It's been a while since we last chatted. You know, we've heard that investor enthusiasm-- because of the investor enthusiasm and the run-up in some of the valuations, that some sort of pullback or perhaps even a correction was likely in the markets. We had seen all three major indices in the red a little bit earlier today. I'm wondering if you think that we're at the start of that or if you're anticipating some sort of pullback or perhaps even a correction coming soon.
BRENT SCHUTTE: Well, I think pullbacks happen quite often in the markets. And so, it's really hard to predict their occurrence. I guess, the one thing I'd focus on is, if you look throughout the remainder of 2021, I think we all believe the economy will be higher. And typically, if the economy is higher, the market will be higher because it's eventually drug along with it.
And so if you look right now, earnings on the S&P 500 are actually coming in much better than expected. I believe they're 19% above where they were expected to be. And that is a large number. Revisions for the future are going higher. And if you look out and you think about the economy, you have fiscal stimulus, which I know you guys were talking about earlier-- more of that's on the way. Monetary policy is not going to stop until it gets inflation. You have potentially the virus and its impact.
And I think a couple of important things-- you have a manufacturing rebuild that's underway, and you have consumers that, in aggregate, have saved quite a bit of money. They haven't spent the relief packages. And so you're going to see strong economic growth in 2021. And even if there is a correction in the near term, I still think the future looks fairly bright.
KRISTIN MYERS: Now, you said in your note that you expect market leadership to change this year. What do you think is going to lead the markets this year?
BRENT SCHUTTE: So a lot of the things that we've been talking about when I come on the show-- and it's actually already occurring. It started happening in the third quarter when we saw that the economy was broadening back out. And so if you think about the economy for the past two years-- actually, almost three years-- you had a trade war that started in 2018. Around mid 2018, that trade war became real, and it knocked out the cyclical side of the US.
And so we had this narrow economy. We just had the tech economy that was able to pull the US higher. And that showed up in the markets. The only market that was really up during that time period was the S&P 500, which has a large concentration in tech stocks. That started coming off the boil a bit in the fourth quarter of 2019 as the trade war ebbed.
But then we got hit by COVID, which had the exact same impact. And that initially was the S&P 500 dragging us higher. Now you're seeing a more broad-based recovery. The economy will be broad, which means the markets will be broad, which getting back to your answer to the question, we still think small caps lead. Indeed, they are up 51% since the end of Q3. And we think small caps and mid caps, and we actually think value and cyclical will do well.
KRISTIN MYERS: So then to that point, is really now a time that investors really need to start looking at their portfolios? I know that we like to-- we hear a lot of folks saying buy and hold. But is now really the time, based on what you're saying, that investors to start looking at their portfolios and think, perhaps I need to start playing around a little bit here and start making some reallocations?
BRENT SCHUTTE: Yeah, my fear is that a lot of investors always fall prey to investing solely in what's worked in the past. And I believe right now reminds me of 1999, where a lot of investors only want to invest in the S&P 500. They only want to invest in technology stocks. And my primary purpose for bringing these comments about a broader economy is first to make sure that people don't lose sight of the fact that there are other parts of the market that haven't done well for years and are now doing better, and we expect they will in 2021 and possibly into 2022.
So the first answer is to stay diversified. And the second one is that you can nudge your portfolio in that direction. I'm not saying the S&P 500 is a bad investment. I'm just saying there are other markets out there that will likely do better. And just because they haven't done well over the past couple of years, I think that's been because of what's happened in the economy. And I think that is shifting as you look in the future.
KRISTIN MYERS: All right, when you say that you see parts of the market that remind you of 1999, for anyone that remembers what happened right after '99, there should be some alarm bells ringing there. I mean, do you think that this bubble is going to be bursting any time soon, that we're going to see the markets really take a huge leg lower, like we did after the dot com bubble burst?
BRENT SCHUTTE: Well, I think that's where I'd first start, with a little bit of a correction about what people think happened after 2000, and they think it was a lost decade. It was only lost in those stocks that were really bid up about what they may do in the future. And then they had no earnings. And when the earnings didn't come through, those stocks actually didn't do well.
During that expansion from 2000 to 2007, actually, US small and mid-cap stocks, I believe, were up between 8% and 10%. Emerging markets, another area we like, was up somewhere around 20 something percent. And so, I really think you're looking at parts of the market that are more than likely-- I'm not going to say bubble, but are probably discounting a lot of what they may do in the future. I would look for stocks that have earnings that are more cyclical. And I think regardless of what happens in that other subset of the market, I think those areas will be the ones that push us forward in the coming years.
KRISTIN MYERS: A great reminder for everyone at home. Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management, always great chatting with you. Thanks for joining us today.
BRENT SCHUTTE: Thanks for having me.