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I think that lockdowns will come with the additional stimulus that the market is looking for: Strategist

Brent Schutte, Chief Investment Strategist, Northwestern Mutual Wealth Management Company joins the Yahoo Finance Live panel to discuss the impact of COVID on the markets.

Video Transcript

- Let's bring in our guests, Brent Schutte. He is the Chief Investment Strategist at Northwestern Mutual Wealth Management Company. And Brent, it's interesting, you hear Angelique talk about these cases that are really concerning across the country. And yet, I'm looking at where the market is today. Why do you think we're seeing these gains? And has a lot of this concern around these COVID cases-- have a lot of investors looked past it in anticipation of that vaccine that really started this week off and created a big pop?

BRENT SCHUTTE: Yes. And certainly it's a health concern. But the market is a discounting mechanism of the future. And that means more than a few months out. And so, while the winter may be tough, while we may have some more lockdowns I do think that any lockdowns would be accompanied by additional stimulus, that's an important concept because that's what got us through the last time we did this. I think the market is looking at that end date, potentially, on the calendar of the beginning of the year, beginning of spring-- late spring, I should say, when the virus actually stops exerting as much pressure on the economy as it has in the past.

And so, the market discounts more than a few months in the future and it is looking at 2021 and seeing additional fiscal stimulus, still easy monetary policy, a virus that is ebbing, inventory rebuild that has to happen, and an improving global economy. And that's why it's pushing higher.

- Yeah, and Brent, I mean, if we look at the swings here obviously this week, it's been most evident in stocks that have traded, have gained boosts off of the stay at home trade. You can look at Zoom. At one point this week, it was down 14% for the week. At a high, it was about break even. Now it's down by about 5% for the week. Talking about the right strategy for investors to play the chop in the short term here since you oversee about $175 billion retail assets, that's a lot here. What's the advice for investors watching to navigate it?

BRENT SCHUTTE: To really not play the chop. And so I mentioned that the market looks longer term. And I think the trends that were in place on Monday that you mentioned where the things that have been impacted by COVID, the things that are more economically sensitive, they will work as the economy broadens out into next year. And so, there's going to be a back and forth. People make money trading short term. I don't believe investors, especially individual ones, should try to beat them at their own game.

And so, you will have these bouts of back and forths where stay at home stocks work versus the go out in public stocks. But at the end of the day, next year we will begin inching back to where we were pre-COVID. And that to me means an economy that broadens, that means earnings growth that broadens, that means a cyclical recovery. And that means you should overweight things like small and mid-cap stocks and value stocks. Not that I think that the stay at home stocks aren't still good longer term, I just think next year's calculus for what moves the market higher is different than this year.

- I mean, how should investors be looking at those stay at home stocks? Are they still big growth plays? I mean, are we still anticipating the kind of growth that we saw over the last few months? Or it sounds like you think that maybe some investors should rotate out as we saw this week.

BRENT SCHUTTE: Sure. There's a definite secular trend towards the things that we're doing today towards Zoom or whatever else it may be. But that trend was really accentuated and overplayed by COVID. You're going to inch backwards towards the other side. So maybe it's helpful to think of it this way. Over the past few months, technology has really been the only earnings game in town, right? So the pandemic hits, earnings fall, but technology stocks hold up well because they're not as impacted.

Now you're starting to see earnings growth broaden out. You're seeing earnings accelerate. You will see that continue into next year and technology will no longer be the only earnings game in town. You are going to see big earnings gains and things like small caps, things like the sectors that have been impacted. And that will attract investors' attention in 2021. Beyond that, perhaps these stay at home stocks are still worthwhile investments. And I'm not saying that you should move all the way out of them, but I think investors should use any of these back and forth over the coming weeks to nudge towards those things that will work when COVID hopefully becomes no longer a pandemic.

- Brent, what about the two big tech names that we are expecting to come to market here? We're talking about Airbnb, Door Dash filing its S-1 today. These are, if you looked through the numbers, platforms with huge growth opportunities. How are you looking at these companies and what do you think the appetite is right now?

BRENT SCHUTTE: Well, luckily I don't have to comment on individual stocks because I hire someone else to do that. So I'm not for sure about Airbnb and any other stocks that are becoming public. I really think those things are all secular girl stories. And they attract investors fancy because their story stocks. I just think next year a more return to the fundamentals. Think about what hasn't worked.

Think about, for example, small caps, to talk about economic leverage. Small cap earnings fell from about $10 in the fourth quarter to negative $8 in the first quarter, to $0 in the second quarter. They're now back to $12 and they're expected to continue to grow like that next year. The old school things that haven't worked will be where you want to be next year. And these other things are great stories and they're probably good long term investments, but I think people looking to produce some returns next year should think about some of the more old cyclical type companies in sectors of the economy.

- Yeah, Brent, you say don't play the short term chop here. So let's play the flip side of that too and looking farther out in some of the cyclical names, perhaps some of those names that had been beaten down. Because I'm looking at some of these stocks like the cruise lines we've been talking about and how much they're diluting the upside here. If you are looking out longer term, how should investors look at that if there might not be as much upside even as the earnings potential continues to grow if we are to get back to normal if they keep selling more and more shares?

BRENT SCHUTTE: Yeah. I mean, I think about the banks back in the day, back in 2008, 2009. They certainly sold a lot of shares. And for the next couple of years after the recession ended, they were still good performers. And they actually provided-- I believe they were the best performing sector for the three years after. And so, I don't think it's an all or nothing game. I do think there is some delution that will occur.

But if you think about competition in many segments of the market that are impacted, what happens during recessions is that there's consolidation, there's companies that get washed out. And then the companies that are survivors actually earn bigger profits because the competition is less until that invites competition again. And then we start the cycle over. And so, I wouldn't shy away because of dilution. Certainly that can lower earnings a bit what you get. But overall, I think there is still a big pent up demand and things that people haven't been able to do for some time. I don't think the world's going to change completely where people don't go on those things, those cruises anymore.

- Brent Schutte, the Chief Investment Strategist at Northwestern Mutual Wealth Management Company. Good to talk to you today. BRENT SCHUTTE: Thank you.