Inflation reaccelerating across various segments, says Northwestern Mutual's Schutte

Let’s bring in Brent Shooty, he’s Chief Investment Officer with Northwestern Mutual Wealth Management. Brent, welcome, good to have you back and we talk here and I believe one of your thesis is that it may be difficult for the Fed to cut rates maybe at all this year. I’d love to hear you elaborate on that. But so we’re in this hire for longer phase. Was the mistake here that the that the Fed didn’t go even higher? I don’t think so. I just don’t think inflation is dead yet. And that’s why we’ve had this consistent belief for the past few months despite the narrative to the opposite that inflation is not coming down. It’s actually re accelerating and you’re seeing that across various segments. I think the market has ignored it because they want to latch onto the soft landing and chair that has. Our chair Powell has ignored it just a bit too because I think he wants to latch onto that also. Look, nearly every inflation measure over the past few months is moving up not down. The longer rates stay elevated, the more they work their way into the economy. I think the mistake we all made or at least a lot of us made was that we thought because there was a quicker tightening cycle, the economy would fall more quickly into a recession. That’s not been the case because the consumer has that excess savings. A lot of consumer debt is in fixed rate mortgages, which haven’t repriced, but you’re seeing it start to impact lower consumers. You’re seeing it start to pile up on auto loans, corporate or, I’m sorry, auto loans, credit card debt, you’re seeing increased delinquencies there. And so to me, the inflation narrative is the most important narrative and I don’t think the Fed is going to be able to cut aggressively enough to lower rates. And again, the longer rates stay higher, the more the economy reprices. And we’re only two years into this post, the original tightening. On average it’s taken 10 or 2 1/2 years with the longest being 4. So. So let me come back to you. Cutting rates is not a strategy for for tightening down on inflation. The opposite would be true. So what do you recommend for the Fed? If the Fed is is hell bent on getting inflation down very close to 2%, what is their next best step, I think right now to stay the course and not lower rates? Look, I think the bar is high for them to raise. They’ve made some mistakes in the past. I doubt they want to have an egg on their face and actually start tightening rates, especially before an election. And they have also said they’ve said expressly that they believe that the peak in this rate cycle has been hit 100%. And so I think the bar is high for them to tighten. We’ll see. Look, I think the bottom line, and I keep coming back to this, is we’re late in an economic cycle. We can all try to guess the timing of a recession, but I think we can all agree the unemployment rate is low, The wage wages are high. They’ve come down, but they’ve stalled out at 4%, which has historically been the top of what the Fed likes. the Fed likes that at 3 to 3 1/2 percent. I don’t think there are a ton of new people to come back into the labor market and inflation is stickier in that scenario. And so as an investor, you need to think end of economic cycle, not going out and taking a bunch of risk or at a minimum just making sure you’re taking risks that you’re comfortable with. OK, So you lead me to our next question. Let’s get to the news you can use if you’re an investor and you want to make some hay in this volatile time, some rocky road and getting inflation down and the guessing game around interest rate hikes or cuts, how do you invest right now and who and who benefits? I I think the keyword is investor. Are you a short term investor or are you a long term investor? Look, days like yesterday could continue. You saw the market falter, you saw bonds falter quite a bit, but bonds today yield 4 1/2 or 4.55. I think we saw in the introduction of the 10 year the Barclays, our Bloomberg aggregate index yields over 5%. I think any investor should be happy moving into fixed income in these environments because the yield is high and who knows what the next three, 5-7 years bring. I think the Fed will be able to cut rates aggressively once we do see kind of that last inflationary impulse burn off. The other thing unfortunately is I think people are being drawn to the mega cap story. So if you think about it, the commentary goes, these are economically insensitive, they’re longer term, they’re higher quality and therefore you should invest in them. And on days like yesterday they outperform. The question you have to ask yourself is how much do you pay for that quality and the other economically sensitive stuff, how well have they had not already done because people have been not buying them on days like that? I think that narrative shifts. And so I think about investing through and on the other side. And I think small and midcap, while not an instant gratification trade, I think if you’re an investor, you’ll be happy you’re buying those during this time period in the next 2-3 five years as well as even equal weighted SP or things that are more broad in nature because the market advanced has been pretty narrow. Things like small and mid have not been bid up. They’re still below their all time highs and they traded historically low valuations just given the fact that people are aware of this, but they’re gravitating towards those mega caps which are economically insensitive, which I think will become economically sensitive and then people will wonder why did I pay this much for those.