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What you're seeing today is nothing driven by economic or virus news: Strategist on the market sell-off

Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, joined The Final Round to discuss today's market sell-off and why he thinks the economic recovery with slowly start to reach other sectors of the market.

Video Transcript

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MYLES UDLAND: All right, welcome back to "The Final Round" here on Yahoo Finance. Myles Udland with you in New York. Again, watching the sharp selloff here in the market. We've got the S&P off more than 3%, the NASDAQ is down 5%, the Dow is off just a bit less than 3%, so we're moving off our worst levels of the session. But again, a big pullback today after we hit record highs for the S&P and the NASDAQ during yesterday's session.

And for more on everything going on in the market right now, we're joined by Brent Schutte. He's the chief investment strategist over Northwestern Mutual Wealth Management. So Brent, let's just start with what you make of today's move. If it does anything for you in terms of changing how you're thinking about the overall setup or if it's just sort of a pullback similar to what we saw back earlier this summer.

BRENT SCHUTTE: No, actually we've been positioning for this for the past few months. What you're seeing today is nothing driven by economics. It's not driven by virus news. In fact, economic growth will continue to be strong. You'll probably see a good jobs number tomorrow. And on the virus front, the news is trending positive. And really, really interesting, yesterday we had really positive news, that we may actually have a vaccine by October or November. And what's really perverse, is that may be causing today's selloff.

So if you think about it this way, the market has been driven higher really by stocks that benefit from us all staying at home. So if you think about all those tech stocks, in some way, shape, or form, they really benefit from what is happening right now. I'm on this call virtually. If we have a vaccine, that means we won't be staying at home as much. And that economic recovery is going to broaden out, and the earnings recovery will broaden out.

So to me, this is more of a leadership change. You are thinking in the future, or we are thinking, that we're actually going to have different types of stocks that haven't participated do better. And right now, you're having the stocks that really led the market higher, sell off. Now that is causing some rumbling, it always does. Trend changes do. But in general, we do believe that those names will eventually find their footing and push higher, while the rest of names that are struggling a bit today, are probably in for a period of at least some sort of struggle while other names push us higher.

MYLES UDLAND: And so you mentioned that kind of trend change, the leadership change. Obviously, today's, I guess the height of it, the magnitude of the decline is a little bit shocking, but I guess that overall, you're sort of outlining a scenario where you're not surprised. And I kind of described it earlier in the show, you're not surprised to see everything that worked getting dumped, and everything that hasn't kind of performing better.

BRENT SCHUTTE: Yeah, and this happens from time to time. And I take you back to 1999, and I've been talking about this time period, 1999, a lot, and in 1999 the market was pushed higher really on the back of a few stocks, just like today. So there's 10 stocks right now that make up over 30% the S&P 500 that have really pushed us higher. There was a similar setup of back in 1999. And the narrative back then, was that these stocks were going to change how we live forever. Now really interestingly, they probably did actually change how we lived, but their stock prices already reflected that.

And one might imagine that some of their technology actually accrued and benefited companies that hadn't actually done well. So that was where the action was pushing forward. And I'm not suggesting that today is exactly like 1999 and that PEs are like they were back then. But I do think the setup is similar. And I think that the leadership will be similar pushing forward. And so we do like US value, we like US small caps, like US mid-caps, things that have really been left behind because they are more economically sensitive and need broad economic growth, which has been lacking, but won't be in the future.

SEANA SMITH: Brent, When you take a look at the market's recent behavior, then equate that to what we've seen in the economy, I mean, the economic data has been improving a little bit, but still really lags behind. Is there any point where you think the market is going to take more notice of that or that becomes a bigger story in terms of potential future gains?

BRENT SCHUTTE: So I actually think that the market has been rhyming with the economy. And so if you look at, we talk about the market, we just look at the S&P 500. And it's really being driven by those 10 names. The rest of the names have actually languished quite a bit, and small and mid-caps are still down for the year. And value stocks have been absolutely just beat up. And so I think the market has rhymed with the economy. It's been driven by those 10 names.

And now I suggest that, as the recovery broadens, which it is already, so if you think about it, every single day we wake up, the economy economy's adapting and the virus is impacting the economy in a lesser way each and every day. I mean, you're seeing more and more segments of the US economy come back on line. As that happens, earnings broaden out, and that's where I think you're going to get this trend change towards those names that have really rhymed with the economy, which are the ones that are beaten down still.

MYLES UDLAND: And then, Brent, just thinking about maybe the Fed's role in here. Obviously, the Fed has had a huge part in how we've gotten to this moment, but this sort of change in character in the market that you're outlining comes just a week after the Fed itself really changed how they expect to respond to this stronger environment that you're outlining. How is that going to play into your thinking just longer term? Maybe over the next couple of years, as we expect the Fed to most likely sit tight in the face of what they're essentially saying is going to be higher inflation, or at least inflation above their target.

BRENT SCHUTTE: So this is, we've been investing definitely for the past few years just because of what the Fed is lurching towards, which is what they have now put in stone about what they will be in the future. So the old Fed used to focus on intermediate term economic growth and didn't like moral hazard. Today's Fed focuses more on markets and pushing them up, because that's the only tool they have left really to actually push the economy up. And so I do think the Fed is a backstop towards the markets.

If you remember back to 2019, the Fed entered the year looking to actually raise rates on their economic forecast. They didn't change their economic forecast, but they cut rates, because they were listening to the markets. And so I do think the Fed is still very much a backstop for the markets. It doesn't mean we can't have bouts of downside, but I do think it means that the downside will be less, ala what we just saw during this period of COVID.

MYLES UDLAND: All right, Brent Schutte with Northwestern Mutual. Brent, always great to get your thoughts. Thanks so much for joining the show.

BRENT SCHUTTE: Thank you guys, yep.