Fed: 'When you stabilize the bond market, you stabilize the stock market,' strategist says

Northwestern Mutual Wealth Management Company CIO Brent Schutte joins Yahoo Finance Live to weigh in on the Federal Reserve's next moves fighting inflation and how it might impact markets.

Video transcript

- Brent, it's great to see you again. So we're looking at stocks trading higher for the third day in a row, NASDAQ leading the way today, up nearly 2%. What do you make of the buying action? And, I guess, do you think the gains that we've seen recently-- do they have staying power?

BRENT SCHUTTE: I do. And certainly, the market's kind of gone back and forth. And I expect it to remain volatile. But the big component of today was the sticky inflation narrative continues to fall by the wayside. And so I know that backwards inflation numbers still look elevated. But housing was brought up earlier in this segment. The housing market is important because the "sticky inflation" right now is in the services side of the economy. Housing and rents make up 32% of the 56% of the sticky inflation in services. Housing market is weakening. That housing market weakening, that rent market weakening, shows up with a 12-month lag in the CPI number. And as you saw today, housing prices aren't going up. They're going down, as are rents. And so if you think about that in the future, sticky inflation will be coming down because that housing market data, which is now faltering, that rent data, which is now faltering in current rents-- that will begin showing up in the inflation number. And that will combine with goods prices, which are also falling, and commodity prices, which many people aren't talking about. But commodity prices are flat on a year-over-year basis. And so, I guess, to kind of tie it all together, you are seeing inflation, forward-looking inflation, measures coming down. That has stabilized the bond market. And when you stabilize the bond market, you stabilize the stock market. And that is why you are seeing upward pressure on both stocks and bond prices today.

- Leading you, Brent, to believe the Fed is going to do what, when?

BRENT SCHUTTE: I think they probably tighten 75 basis points by next week. They take it. They want to get to a place where they believe monetary policy is tight before job losses start accruing. So if you think about that, they didn't want to be tightening at the same time the job market is weakening.

One other data point that came out today is that the jobs market, which is believed to be tight-- we've noted this bit in the past-- in the Conference Board, there is a question-- two questions. Are jobs easy to get or are they hard to get? This has an incredible-- the diffusion between these two has an incredible correlation with the unemployment rate. That fell again today. We're 15 points off the high.

If I look back in prior cycles when this happens, you start seeing the unemployment rate rise and actually start seeing negative jobs reports. And so believe it or not, in today's environment, that is actually a positive because it shows that some of these forces that have led inflation higher are starting to abate, which has been the market's big problem and the Fed's big problem. And that means the Fed will eventually be able to stop, hopefully, after they do 75 basis points this time.

- So Brent, you don't think they're going to raise rates then in December?

BRENT SCHUTTE: I think they would say they're data-dependent. If we've learned anything, they're incredibly reactionary. Keep in mind at the beginning of the year, the Federal Reserve thought they'd raise rates by 0.875% this year. And the "outlier" on the dot plot was 1.1%. This is why the market's been so volatile-- is because the Fed has been chasing this and been wrong for some time. Hopefully, they are able to stop. Hopefully, they're able to see the inflation number coming down. They want to see that first before they stop tightening so that you don't believe they're not on the job. But hopefully, we'll start seeing that in the coming months' data.

- Despite all that, recessionary fears remain high. And bank CEO after CEO is added to that suspicion. And then Jamie Dimon did something interesting at Davos in the Desert in Saudi Arabia. Let's listen to that and get your reaction.

[VIDEO PLAYBACK]

JAMIE DIMON: There's a lot of stuff on the horizon, which is bad and could-- doesn't necessarily, but could put the United States in recession. That's not the most important thing for what we think about. We'll manage right through that. I would worry much more about the geopolitics of the world today.

I think the most important thing is the geopolitics, what's going in Russia, Ukraine, America, China, you know, the relationships of the Western world. And that would have me far more concerned than whether there's a mild or a slightly severe recession.

[END PLAYBACK]

- Always interesting comments from Jamie-- your reaction, Brent?

BRENT SCHUTTE: Well, he's had a few comments lately about economic storms and hurricanes and whatever else it may be. So he's been kind of all over this place.

Look, I've said it for a while. I'll say it again. We are going to have a mild recession. At least, I believe so. We have never seen leading economic indicators where they're at today and not been in a recession or had a recession.

I don't think that's necessarily so important because I don't think inflation survives a recession. And I do believe the recession would be mild because overall, despite the negative, the consumer remains in great shape. And so what I'm hopeful for is that we have this pullback, we free up a little labor market slack, the Fed stops, and then we're able to come on the other side of this with inflation falling and we're kind of returning to a normal environment.

Geopolitics are definitely a cause for concern. We own gold because of that. And so I'm suggesting that maybe you should think about hedging a little bit of your portfolio. But please don't overdo it because I don't know for certain, nor does anybody, what happens with Russia and the Ukraine.

- So interesting-- you're allocating some of your portfolio, at least, to gold. What else are you doing with your portfolio at this point?

BRENT SCHUTTE: So we did lengthen our bond portfolio. We did that last week. If you think about bonds, and this is where you've had a repricing the bond market, which has caused the repricing the stock market, especially in those names that you mentioned to open up-- you mentioned growth stocks. You mentioned meme stocks. You mention things that rely upon 0% interest rates.

At the beginning of the year, the Barclays Aggregate Bond Index yielded 1.5% to 1.75%. It now yields 5.2%. Longer bonds provide a hedge against a downturn, potentially a recession. And they provide a hedge against other bad and adverse actions, such as geopolitics. And so I think-- I'm fearful that investors now think they should hide in cash. They should own the front end of the curve. They should extend their duration out just a bit.

Second and third, we continue to like things in the US that are cheap. We like US small-caps, as represented by the S&P 600, which are rallying heavy today and are actually one of the best performers year-to-date, as well as US mid-caps. Those parts of the market are cheaper than large-caps. And they've discounted the potential for earnings declines already. And they will do better on the opposite side. And so that's, all in all, kind of where we position our portfolio overall.

- All right. That's good stuff. Northwestern Mutual Wealth Management chief investment officer Brent Schutte, good to see you, sir. Thank you.