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‘The Fed needs the stock market to remain strong’ : Strategist

Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, joins Yahoo Finance Live the outlook on the market, expectations of the Fed, inflation concerns, and the latest on the housing market.

Video transcript

KRISTIN MYERS: And I want to turn now to Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, for what we can expect from the Fed a little bit later throughout this show. So, Brent, I want to start with what you are expecting from the Fed today, and particularly, just on what Brian was hinting at about those movement in that dot plot-- are you anticipating that there could be some movement, at least in where they see interest rates going?

BRENT SCHUTTE: Potentially. But I think the bigger thing here, and the phrase that I keep hearing from the Fed, is outcome based, not outlook based. And so I know there's a focus on inflation right now. The Fed believes that's transitory, as do I.

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The bigger focus for the Fed is on the labor market. And you still have around 12 million people-- so you had people drop out of the labor force, and you still have less people employed pre-COVID-- that they want to bring back into the labor force before they begin doing anything. Now, that all being said, I do think they want to avoid a taper tantrum.

So perhaps they advance the ball just a bit, but not much. And so all in all, I don't expect much new news. And certainly, what I do want investors to remember is that there is a big difference between the Fed beginning tapering and the Fed tightening the economy into a recession. As an investor, you're going to need to ignore the noise that comes out over the coming quarters as the Fed tapers, because that may cause a near-term correction, but it certainly won't cause a recession.

And recessions cause big stock market downturns, not corrections-- not non-recessionary corrections, I should say. And so keep your eye on the ball, stay invested, and ignore the noise.

ALEXIS CHRISTOFOROUS: OK, maybe a little easier said than done, Brent. But what are you doing in terms of having a defensive portfolio in this environment with so much uncertainty? I mean, you know, inflation is here at the moment. Whether it's transitory is still to be seen. So are you making some moves in that portfolio right now? And can you share those with us?

BRENT SCHUTTE: It's way too early to be defensive. If you think about it, growth in the US hasn't even peaked. Typically, you start thinking about becoming defensive when growth picks. And based upon the ISM surveys-- so you have a lot of new orders coming into factories, you have huge backlogs, you have low inventories-- we haven't even seen peak growth yet, and the Fed hasn't even tightened for the first time yet.

And so I would advise people to stay more invested towards cyclicals. And if you want, and I think you should, begin thinking more about international equities, specifically the eurozone, where their recovery is just beginning. They are actually coming out of a double-dip recession. They actually had negative GDP growth in the first quarter, and you're going to see positive in the coming quarters because they're having increased vaccinations, they're beginning to reopen, and you're going to see earnings growth there that is similar to what the US just had.

And that, I think, will attract investors' attention as this US recovery becomes much more global. And certainly, the eurozone is leveraged to a global recovery.

KRISTIN MYERS: I want to ask about the taper tantrum. I can't remember now who said it to us-- Alexis, you might remember-- but we were essentially told that the taper tantrum, they believed, had already actually happened. Curious to know if you agree with that point of view, and if not, what we can expect going forward then.

BRENT SCHUTTE: You know, perhaps you could say that because you did see a spike in bond yields which caused some of the quote unquote "froth" to come out in some of the stocks that are based upon hopes, dreams, and themes, which I think, again, will probably be under pressure just a bit as we do have the Fed start talking about tapering.

But I do think there's the potential for more. But keep in mind, the Fed is going to try to do everything they possibly can to avoid that. They've studied that. They look at investor behavior they'll probably test and probe a bit. Powell may do so today. And then they'll have speakers come out over the next few weeks and walk it back if there's damage repair needed to be done.

Because the one thing that I know about the Fed is that they typically don't like to cause big market disruptions during the day when they're talking. And typically if they do, they will walk it back. And I remind you once again-- the Fed needs the stock market to remain strong, because the way the Fed impacts the economy today is, quite frankly, through the bond market, which has an indirect impact on the stock market. And if the stock market falls, the Fed won't like that.

ALEXIS CHRISTOFOROUS: I want to step away from the Fed for a moment and talk about some housing news we got today that I found pretty startling, Brent. Apparently, according to the National Association of Realtors, the US needs 5.5 million more units to ease the housing supply crunch we're seeing right now. Yesterday, we had on the CEO of the National Home Builders Association talking about home builder confidence now being at a 10-month low. Home builders are having a tough time getting loans as raw material costs continue to rise. Could, ironically, the booming housing market be the thing that might trip up the economic recovery in the coming months?

BRENT SCHUTTE: I don't think so. I mean, you can view it as good news or bad news. I mean, the good news is that we need more houses built, which actually has an economic multiplier to it. I think in the near-term, the bigger concern that I had was on the inflation side.

And I think, actually, the quote unquote "disappointing" home news, which is still pretty good because it's still at pretty high levels, is that people aren't going to create some sort of price spiral, I don't believe. And so if you look at the NFI-- I'm sorry, the University of Michigan last week, people said it wasn't a good time to buy a home because of rising prices.

Now, that may sound bad, but if inflation is your primary worry, that means that people are not going to cause that price spiral by actually outbidding each other. I know some of that's going on, but I do think people are still remaining sensitive to prices, which means to me that inflation will likely be transitory in the near-term, because a big part of inflation is not only supply versus demand, but also people's expectations. And right now, people seem to be a bit more sensitive to rising prices, which actually should keep inflation at bay.

KRISTIN MYERS: All right, Brent Schutte from Northwestern Mutual Wealth Management, thanks, as always, for joining us today.