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'The U.S. economic data looks V-ish': Brent Schutte

Northwestern Mutual Wealth Management Chief Investment Strategist Brent Schutte joins Yahoo Finance’s Kristin Myers to discuss the market outlook ahead of the 2020 election.

Video Transcript

KRISTIN MYERS: Want to start with market action, so we're joined now by Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management. Brent, great to have you join us yet again. I'm wondering if you can first talk us through this COVID market that we're seeing right now. As I mentioned, a month-long downward spiral. And yet in the same-- in the same moment as I'm saying that, we're also talking about the best two days since June. Financials right now up about 2.7%. They're having their best day since August. So-- so walk us through what you're seeing right now.

BRENT SCHUTTE: Yeah, I-- I guess broadly speaking, I still think the rally is supported by four basic realities. One, the economic data, despite all the down four weeks that we had. So we did have a market that had gone straight up, and you probably had some people getting out before a potential fall spike in cases and the election. But broadly speaking, economic data is still strong.

Yes, there are weak parts of the economy, but they're being outweighed by stronger parts. And quite frankly, most of the data does look dec-- COVID cases are up, as you mentioned in your opening also, but you have to remember we may have news on a vaccine in the coming weeks. And so if that were to be the case, I think markets would look past any near-term spike with the hope that we'd be getting the vaccine into the public in 2021.

And you mentioned the stimulus. That is a-- an accelerant today probably because that is being re-debated again. And then finally, you still the Fed behind you. You have the Fed holding rates at 0%, which makes stocks look all that much more attractive relative to bonds in the current environment. And so that is the-- the recipe, we think still, for higher markets, albeit with different leadership as we do get more cyclical sectors outperforming, especially if we get that vaccine, which means broader economic increases in the future.

KRISTIN MYERS: I want to actually ask you about cyclicals in just a moment, but I'm wondering first if you are seeing this as an end to the correction. Or are you anticipating any more losses in the coming weeks?

BRENT SCHUTTE: Well, the coming weeks are hard to say. I typically look 6 to 12 months out, and that's where most of my comments are made in that context. And if you think in that kind of commentary, if you think 6 to 12 months and you think the vaccine being potentially out into the public in April, or at least in 2021, that is one of the reasons why we're positive.

In the coming weeks, I-- I think it's going to be back and forth. I mean, if we have a spike in cases, certainly the market today reacts to that, albeit less than it did in the past because we did get past June and July. So we did have a spike. We got past that. And I think it is worth repeating, I know I say it over and over, but the US economy has adapted.

So even during that spike in June and July, that did not upend the economic recovery because most of the US economy has figured out how to-- how to operate in a COVID-influenced economy. And so more volatility likely, especially with the election on the-- on the docket, but still higher over a time period in which I care about, which is more 6 to 12 to 18 to 24 months.

KRISTIN MYERS: All right, so 6 to 12 to 18 months. Let's go to your time frame because I'm-- I'm going to have to ask you about the election, which, of course, is only less than a month and a half away. But longer tell, as you were mentioning, cyclicals. Cyclicals doing very well right now. Tech, of course, had been leading the way in the markets, and of course, led the way lower in that sell-off. Is this a time, do you think, that people need to start looking at their portfolios and say, hey, maybe I need to start rotating more into cyclicals?

BRENT SCHUTTE: Yes, we think investors should continue nudging more towards cyclical just given all the different things that I've mentioned, plus the reality that they're very cheap relative to their technology counterparts. And so if you think about the last six months or even prior to what I just mentioned with regards to the economy, so once upon a day, technology stocks were pretty much the only game in town because they're the only part of the economy that was growing and their profits were growing.

As you start thinking about the rest of the economy coming back online over the prior three months and potentially more into the future, you are likely to see bigger profit growth among some of those more beaten down sectors, which I think will re-attract investors. And so, yes, you do need to start, or at least continue hopefully, nudging your portfolio more towards cyclicality, towards small caps, towards things that haven't done as well during the COVID environment.

KRISTIN MYERS: So I have to ask you, of course, about something that is going to be happening a little bit more in the shorter term, 36 days away from the election. And, you know, every time we talk about elections, most analysts are saying, listen, markets don't really pay too much attention to elections.

I'm wondering if you think 2020 is going to be different, particularly if we have a contested election. One strategist over at JPMorgan was saying that that's now the baseline. I'm not sure if you agree with that assertion that a contested election is now the baseline, but how do you think the markets are going to react on November 4 after the elections?

BRENT SCHUTTE: Well, I'm sure there'll be a knee-jerk reaction. If you think back to 2016, there was a knee-jerk reaction to the election that was done in reverse. So the markets did fall initially after that election and then turned higher. I-- I agree with the commentary that I think there's two scenarios under which the market may have a bit of a fit.

One, and the biggest, would be a contested election. That certainly would create maximum uncertainty. The second amount of uncertainty that would probably be created was if there was a Democratic sweep because that would be quite a change from the environment that we're in. I'm not saying good or bad, but just telling you the way I think the market would look. The bottom line, though, is that I think that presidential elections are overinfluential to people's outlook.

And so I'm not telling you they're not important, but from a market perspective, to me, where a president takes office, where is the economy when the president takes office, and what are the valuations are more important than any of the president's policies. And so if you think about the US economy, it is rather big. It is a democracy. It's capitalistic. And so people tend to look past the next two, three, four years when they make their outlooks.

And I guess kind of bottom line, if I go back and I sort by where you are at in the election-- I'm sorry, in the economic cycle, are you early cycle, are you mid cycle, or are you late cycle? That explains the different market returns under presidential elections more so than their policies. I guess the good news right now is that no matter who is elected, the president is going to be coming into office right after a recession, which typically has led to higher returns.

I would also point out that the Federal Reserve isn't going to change no matter who is elected, and they are very important to the market and your forward outlook. And so bottom line, please don't let politics be the-- the biggest variable in your portfolio calculus. It certainly can be one variable, but not the entirety.

KRISTIN MYERS: A good reminder, of course, is everyone seems to only be talking about what is happening in DC right now. One last question, however, on the contested election. How much do you think markets have baked that in, that baseline?

BRENT SCHUTTE: So I don't think markets have priced too much into the election right now. And, you know, there are always uncertainties before an election, but this one has that thing called COVID before it. And so I-- I do think the market is paying more attention to that because the market does believe, at least I believe that the market believes, that's going to play a big factor over the coming weeks into who wins or who loses.

Do we get a vaccine? Do the cases spike? And how does that play out both in the economy and the markets over the coming months? I will tell you that I-- I do think tomorrow-- tomorrow's debates could start people focusing a bit more on that in the market calculus just because I-- I think there are some questions that some swing voters may have on the different presidents and possible presidents.

And-- and if they're mentally and physically fit, I-- I do think that's a question that some swing voters have that may, you know, come out tomorrow night. We'll see what actually happens. But, you know, I-- I guess it's probably going to be a-- a little bit of reaction up until the election, and then we'll see what happens afterwards.

KRISTIN MYERS: All right, we will have to leave it there. Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, thanks so much for joining us.