Yahoo Finance’s Seana Smith and Adam Shapiro speak with Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, about the latest market action.
ADAM SHAPIRO: Let's talk about all the money sitting on the side and the fear of missing out. To help us understand where we may be headed after the presidential election, we invite into this stream Brent Schutte. He's the chief investment strategist at Northwestern Mutual Wealth Management. To put it into context, that company oversees over $160 billion in retail assets.
So people ought to listen. And I got to ask you, Brent, as we bring you in, $4.6 trillion in money market funds just sitting off to the side. Are we starting to see it come back in? And when it does really rush back in, I would imagine the markets are just going to go wild up.
BRENT SCHUTTE: Yeah, you have a lot of money sitting on the sidelines that has been built up over the past few years. And so I do think investors have been kind of hanging on the sidelines waiting for the election, based upon some belief that it was going to cause a huge downturn. And I think you're starting to see some of those worries come out over the past few days, or maybe even today, which I do think, as you get past this date on the calendar, as we hopefully continue to get positive vaccine news, you will see money flow back into the markets.
And based upon, hopefully, a broadening economy, which we're starting to see, you will see money move towards things that have been hurt more by COVID, not those tech stocks that you mentioned in the opening. And you're starting to see that occur over the last few months, weeks too.
SEANA SMITH: So Brent, that's interesting. You don't think these high flyers, the names that have carried this rally over the last seven or eight months, that they're not worth buying at this point?
BRENT SCHUTTE: No, but I fear that people have overdone it. And so it reminds me of 1999 when a narrow group of stocks drove the market higher. You know, those stocks have been the only game in town for about the last almost a year and a half to two years, just because, first of all, if you think back to the trade war back in 2018, that robbed the US economy of one engine of growth, and tech kind of carried us through.
And then it was starting to re-broaden, and then we got hit by COVID. And so as you think about the other side of this, hopefully, as you think about more stimulus potentially, if there is a blue wave, we do believe that things that are more cyclical and have been impacted by COVID will actually be the better placed over the next, you know, three, six, to 12 months.
ADAM SHAPIRO: And we're all hoping for a vaccine to help lessen the impact from COVID. But I have to ask you, a broader picture here, you know, you believe the economy is well on the road to recovery and that the economic data shows not only recovering the United States but other major economies. And then overnight, we get the lockdowns in Europe, and we see, perhaps, contraction.
And then the economy in the UK isn't as strong as perhaps we would want. So what makes you optimistic?
BRENT SCHUTTE: Well, I think the virus, especially in the US, is having a lessening impact on the economy because we have learned to adapt to it. And so if you think about back to February and March, we didn't know much about what the virus was. Many companies weren't set up to do what we're doing today.
And as we've continued to adapt, as the economy has shifted, as things have moved, spending has gone in different places. As companies have figured out how to serve their clients, the economy has broadened. And we do expect that to continue. Now, that doesn't mean there might not be setbacks, you mentioned the UK, you mentioned the eurozone, certainly, there are setbacks there.
But if you look at the entirety of the US data, if you look at Chinese data out this morning also, those are still strengthening. And so we do believe that you have enough economic momentum to carry us into the new year, when hopefully you get that vaccine announcement, which will, I'm not for sure it puts a complete end to this, but we'll put a date on the calendar when we know it's going to impact our economy less.
SEANA SMITH: Brent, in terms of catalyst that we could see, how critical is it do you think that we get some sort of stimulus package from Washington? Is the market-- it almost sounds like maybe you're making the argument that we don't really need some sort of additional fiscal help at this point.
BRENT SCHUTTE: I guess it's a question of how big of a setback we possibly have on the virus side. The good news is I think we're getting stimulus no matter who wins. It may be December if the president wins, January if there's a blue sweep. But we are getting stimulus. And I guess, to me, if you look at the numbers last week on personal income, surprisingly, the US has more personal income today than it did at the beginning of the year.
That's because we first filled it with relief. Through that, it was fiscal policies, which there is still relief left in the system. And now employment is coming back. And so, to me, it's a question of, do you have enough economic momentum, do you have enough in the system right now to get you through to when we get that stimulus? And I think the answer is yes.
And I don't think either party is going to not do stimulus after the election. I think both will do it. The question is, how much, and certainly, the blue wave, which I think the market is pricing in, would be much bigger.
ADAM SHAPIRO: I do want to ask you about, and it wasn't from Northwestern Mutual, but I think it was JP Morgan, an analyst over there was talking about a really tremendous increase in equities for 2021. But I'm more interested in what's been happening slowly behind the scenes. We've watched the yield on the 10-year start to go up.
So if I'm an average investor and I'm hearing analysts say, stock, stock, stock, then I'm also keeping an eye on what's happening with these bonds, where should I be putting my money? Is it safe to stay in bonds, especially with the yield starting to go up there?
BRENT SCHUTTE: Yeah, I mean, I think bonds serve an important purpose in portfolio allocation. So it's not about being all right or being all wrong, it's about having an allocation that matches what your long-term goals and objectives are. And to me, you know, if bond yields are rising, that means the stocks out of your portfolio is likely doing well because that means the economy is probably doing better.
If it isn't, the Federal Reserve is going to try to lean on those bond yields and not let them rise, which would be a positive to equities. And so there's always this interplay between the two, especially in today's day and age, where the way the Fed impacts the stock market is by keeping yields low. And so I would encourage investors to not overreact either way.
Certainly, we do have a slight tilt towards equities over fixed income, given our belief that markets move higher. But making rash decisions based upon whether or not a 10-year Treasury moves 10 or 15 basis points is not very smart, to put it bluntly, I guess.
SEANA SMITH: Brent, could you touch on just what's going on in the energy market. Because I think that's a area of focus here for investors. We saw Crude really reverse the losses earlier today, rebound from that five-month low. Are you seeing any opportunity there? Because a lot of these names have been for, I guess, putting it politely, have been underperformers of the market so far this year.
BRENT SCHUTTE: Yes, I mean, I think the most aggrieved sectors probably have the best opportunities on the opposite side of this. If you think about what happens in sectors where economic-- where they've had a huge impact from COVID, and even more longer term trends, there usually is consolidation, which you're starting to see in the energy industry. And companies, quite frankly, fail.
The ones that survive are the ones, because of lesser competition, earn super normal profits and are decent places for investment in the future. Now, certainly, over a long period of time, perhaps energy could be going by the wayside at some point, not in the near term, probably, but at some point. But I think, as you look on the opposite side of this, things that are more cyclical, there are opportunities just from the COVID tailwind or hopefully the lesser COVID tailwind, plus the fact that you will have lesser competitors, which means that companies that survive will earn higher rates of profitability.
ADAM SHAPIRO: Brent, historians like to point out that pandemics bring about and hasten all kinds of revolution, whether it be industrial or societal. I'm curious, you point out that the past three recessions ushered in new asset class leadership. So what are you focusing on right now? Because we're coming out of, although it was a short one, a recession, and we're clearly going to have a different world when the pandemic is in the rearview mirror.
BRENT SCHUTTE: So I think a lot of the trends that we're talking about with stimulus, with the fact that the Federal Reserve is not going to stop with modern monetary theory, create a very different background for the next three to five years. Plus, where you may have more cyclical parts of the economy do well, you may get that long-awaited increase in bond yields. You may possibly get inflation, which comes to fruition.
And so, you know, the last few years have been driven by the S&P 500, have been driven by Big Tech stocks. I think the opposite side of this is driven by more value-oriented companies, more cyclical asset classes, such as small and mid-caps, and quite frankly, if you want a historical time period, this reminds me a lot of 1999.
I alluded to that earlier, and I think there are opportunities, even internationally. Yes, I know the eurozone is going through an increase in cases, but certainly, if you do get a blue wave, if you do get a stimulus, I think you will see dollar weakness, which will likely drive the returns of international assets above those of the US for a certain amount of time.