‘This is the most well-telegraphed recession,’ strategist says

Northwestern Mutual Wealth Management Company Chief Investment Officer Brent Schutte joins Yahoo Finance Live to discuss inflation fears, CEO worries, recessionary pressures, the state of the market, and the outlook for the economy.

Video Transcript

BRIAN SOZZI: All right, let's bring in a pro here who might have a take on this. We'll stick with this conversation on the "Morning Brief" newsletter and the market indicators that are keeping tech bearish. Let's welcome in Brent Schutte, Northwestern Mutual Wealth Management Company chief investment officer. Brent, good to see you here this morning. Heard us talking about the "Morning Brief" newsletter. Just your take on the overall environment now. We're still trying to digest some, I would say, hawkish rhetoric from the Fed this week and some disappointing earnings, more layoff news. Where do you stand?

BRENT SCHUTTE: Yeah, I think I come at it differently than Jared does, but come up with the same conclusion. I mean, to me, you've seen those inflation fears kind of tying into your prior segment with CEOs' worries. You saw those inflation fears peak last October. And I don't think it's so coincidental that the market actually bottomed on October 12, which was the day before you actually had the September CPI report that kind of showed inflation beginning to melt.

So I think that's been the tone that's been better in the market. You've seen disinflation a term that Chair Powell used over and over happen. But I don't think we're out of the woods yet. I think you're shifting to recession fears. I think right now, the soft landing is still, I think, something that people think could play out.

But I think you'll eventually get a mild recession, which I think will cause some market consternation. And only once do we figure out that it's going to be short, uneven, and mild, then I think you can actually have that better forward path that Jared's looking for, where the market does move more sustainably up.

BRAD SMITH: What does it tell you that--

BRENT SCHUTTE: So I guess a little bit different than Jared, but same type of outlook.

BRAD SMITH: Yeah, certainly. And Brent, what does it tell you that CFOs, like those that we just heard from Hugh Johnson over at PepsiCo, are forecasting for a mild recession right now? They're practically baking that into their expectations.

BRENT SCHUTTE: Well, I think that tells me that it's largely baked into the market. And so if you think about it, I mean, this is the most well telegraphed recession. The Fed's intention has been to get us to the point of a recession, but perhaps not tip us into that for the last year or so. And so I can't remember a more well telegraphed recession. It doesn't mean that it's all discounted, but certainly a lot of the actions that would take-- that would happen normally during a recession that was a little bit more uncertain in its arrival, I think you've seen a lot of those things already occur.

And so I think it's going to be an uneven recession. I mean, you mentioned Pepsi, and perhaps, it'll be more recessionary there. But you mentioned casinos on the other side of it. I think those parts of the market right now or the economy are still where you're seeing demand. It already feels like a recession, I imagine, in the housing industry.

JULIE HYMAN: All of that said, you said in your note to us there are opportunities in the market, and particularly what you see as cheaper parts of the market. Where are those cheaper parts of market, especially since we've seen a rally this year?

BRENT SCHUTTE: Yeah, this is where I think people come on to your show likely and say if the market were just cheaper, I'd actually be more optimistic. And I think there are cheap parts of the market. So, yes, the S&P 500 overall does trade at around 18 and 1/2 times earnings. But if you look at the S&P 600, which is small caps, it trades at about 14 times earnings that have already been marked down. You think about midcaps-- same type of valuation. And even value stocks, kind of away from that NASDAQ talk that you had in the opening, those parts of the market are cheap. And dare I say international stocks?

And so I think there are parts of the market that are different than what investors are used to actually buying because they didn't work as well over the prior five, six, seven years. I think those parts of the market have already discounted a lot of potential bad news, and they trade at valuations that are cheap. And that's where I think you want to be positioned in 2023.

BRAD SMITH: Hey, Brent, we've heard from Delta CEO, Ed Bastian, in the past that airlines, as well as much as the travel industry, is in a countercyclical recovery. How much longer, perhaps, can that countercyclical recovery still hold the trend or still hold some wind in its own sails, given the fact that there are so many other parts of the economy and the markets and the companies that are being evaluated separately there that are in a very different scenario?

BRENT SCHUTTE: Yeah, and this is where we had a rolling opening. And if you look historically in my 28 years of doing this, I've never seen an economy shut down completely, then shift all to the goods side of the equation, then shift back to the services side of the equation. Look, I think you're going to actually have a mild recession. I think it's going to pull down quite a bit. You've seen liquidity dry up. Eventually, the consumer will pull back as companies begin to lay off more people.

But I think it's going to be incredibly short. And so I imagine the travel industry is going to have a boom as people continue to go back out and kind of spend money in that direction. But with the economy overall slowing and probably layoffs on the way, I do think you are somewhere near to a recession than further away.

And so I think that would be a period of time where that will slow, but I don't think it'll be deep, just given the reality that I don't think the Fed has to keep rates where people are suggesting they're going to have to keep rates. I do believe they will have the option to cut if they need to because I think inflation falls with any recession.