Northwestern Mutual Wealth Management Chief Investment Strategist Brent Schutte joins Yahoo Finance’s Heidi Chung to discuss the market outlook amid optimism over reopening the economy.

Video Transcript

HEIDI CHUNG: But for more on the markets, I want to bring in our next guest. Brent Schutte is Northwestern Mutual Wealth Management Chief Investment Strategist. Brent, the National Bureau of Economic Research earlier today declaring that the US is officially in a recession since February.

Now, this is something that's new here, just given all the bleak economic data that we have gotten as of late. But the NASDAQ again hitting fresh record highs today. The S&P 500 essentially erasing almost all of its losses for the year. So I want to get your opinion on where you think the market is headed next. Do you think there's more room to run from here?

BRENT SCHUTTE: We do. So we've been telling people to ignore the economic data. The reason being is that our primary treatment, or at least our initial treatment for the coronavirus, was to actually socially distance and cause that data to be so bad so that we could do what we are doing today, which is talking about and actually reopening the US economy.

So the market is a forward-looking mechanism. It's looking forward to a better future. It's reflecting the fact that we're opening large swaths of the US economy without significant spikes in cases. And that's why it's moving higher. And we do suspect that in the future, while the returns certainly aren't going to be what they are today or have been over the past few months, there still is value left in different parts of the markets for investors.

HEIDI CHUNG: OK, so where do you think that value is? So if you're an investor right now, a retail investor that's sort of been sitting on the sidelines and you want to put fresh money to work, where do you see that opportunity? Which sectors are you liking here?

BRENT SCHUTTE: So I describe it this way. You mentioned the NASDAQ. And I guess initially what people did to navigate the downside of coronavirus, think about it this way. They attempted to go into virus-resistant stocks to navigate the downside.

Now as you're reopening the economy, they're moving more towards cyclical stocks that will benefit from the reopening. And that's where we still think there are value-- places like small cap, places like mid-cap in the US. Even internationally, which I know many people have wanted to ignore, please don't do that. And that's the areas that we see primarily opportunities in right now.

HEIDI CHUNG: I like that you brought up the small caps. I was going to bring that up as well. I mean, the group has been underperforming the broader market for quite some time. But we're starting to see signs of life officially. The group is up about 15% over the last month or so, and now performing larger caps. What do you make of the overall recovery? Does this say anything about our economy going forward?

BRENT SCHUTTE: Sure. I do think it says that the economic reopening is going well. If you think about small caps, they've really been underperforming since about 2018, when we first were introduced to the trade war. And if you think about small caps, they're economically sensitive and they don't tend to do as well towards the end of an economic cycle.

And so that's what people for the last year and a half, two years have thinking might happen. And we finally had that actually occur. You mentioned the recession that the NBER just reported. And so now as you begin to climb out, macroeconomic conditions are favorable for small caps. And they still happen to be cheaper than large caps. And so that's why I think small caps are actually outperforming and will continue to do so in the near-term.

HEIDI CHUNG: OK, so let's talk a little bit about the near-term risks here to the market. Of course, we have a lot of social unrest across the US, and we also have a potential second wave of COVID-19 infections. But I also want to bring this back a little bit and talk about the US-China trade tensions that we've been seeing as of late. Do you think the market is shrugging that off altogether? Should we be a little bit more concerned here?

BRENT SCHUTTE: I'm not for sure it's shrugging it off altogether. But I do think investors have learned that the administration has tried to manage the prior trade negotiations with China. So if you recall, it was a punish-and-reward or a push it forward and then walk it back if the market and the economy fell.

I think you have an election coming up-- I don't think you have election, I know you do-- coming up in five or six months. And if the administration were to push it too far, it may cause the economy and the markets to topple, which would decrease their chances of getting re-elected. And so I do think there will be an attempt to keep it at a manageable level.

But something for investors to worry about possibly after the election-- because I do believe this is a bipartisan issue, where both parties, whoever is in the White House, whoever is in Congress-- want to continue making progress on.

HEIDI CHUNG: Right. So before we headed into this entire global pandemic, before it broke out across the world and in the US, when we were talking about the election a lot of economists out there were saying-- and strategists as well, I guess-- were saying that status quo in Washington would be ideal for the market. Is that the way you see it as well?

BRENT SCHUTTE: Yes, I do think, at least historically, that's been the recipe for better markets, is some sort of status quo, some sort of balancing act in Washington. I would even take it a step further.

So I think people in some way, shape, or form often overplay how much politics, the impact on the bigger, broader $22 trillion US economy. Where I will say that politics and administrations have an impact is on sectors, industries, and companies. And so perhaps in the future that's something we need to pay more attention to. But from an overall perspective, for right now at least, I feel pretty comfortable where we're at.

HEIDI CHUNG: And finally, for investors right now, again, looking to put fresh money to work, do you suggest that they sort of stick with what's been working? Or those investors that are just holding onto a lot of cash, what's the best play going forward for the rest of this year?

BRENT SCHUTTE: So I believe wealth accumulation happens because of diversification, so I wouldn't concentrate in any one particular asset class or any one particular stock. Look, the world is an uncertain place. You've talked about it over and over in this interview.

I think people who concentrate their portfolios are implicitly saying, or explicitly saying, that they have some sort of knowledge about what's going to happen perfectly. And so I would make sure that I stay diversified. But within that context of being diversified, I do think there's value still within those more cyclical segments of the market that were greatly impacted by the virus.

And as we continue to climb out of this economic valley, I think you will see those provide more of the outperformance that people are looking for.

HEIDI CHUNG: All right. Brent Schutte, Northwestern Mutual Wealth Management Chief Investment Strategist, thank you so much for joining us today.

BRENT SCHUTTE: Thank you.