Is the US headed for a recession despite cooling inflation?

The Producer Price Index (PPI) unexpectedly fell in May, signaling cooling inflation. However, Northwestern Mutual Wealth Management chief investment officer Brent Schutte believes the economy is still on track for a recession and joins the Morning Brief to make his case.

“I think investors are discounting a very easy process. They think that miraculously inflation will fall without causing or slowing the economy too much to cause a recession. They think that the Fed will be able to miraculously cut rates.” and keep a slowing economy from drifting into a recession,” Schutte says. He believes a recession is the most likely outcome, pointing to the low-end consumer already under pressure from credit card and car loan debt.

Schutte explains that the current market is twofold: “While the S&P is up, every other part of the market is down. And the S&P is driven by the ‘Mag Seven,’ which are up 17% while the rest of the S&P’s 493 names actually are down 2%. He adds, “I think there are opportunities for investors. Unfortunately, they’re not in the places people are looking right now.”

For more expert insights and the latest market action, click here to watch this full episode of Morning Brief.

This post was written by Melanie Riehl

Video transcript

Stocks are mixed here to start today’s trading session.

You have the Dow still in negative territory.

Treasury yields are falling.

The moves come after the producer price index was released before the bell, unexpectedly falling in the latest May here and perhaps some evidence that inflation is continuing to cool.

We want to bring in Brent Shy.

He is the chief investment officer at Northwestern Mutual Wealth Management.

But let’s talk about this data we’re getting from here this morning.

What does this ultimately mean here for inequality?

We’ve seen almost this risk rally here over the last couple of prints as the market looks for any kind of good news within these reports.

I’m curious what you think about what we heard from Powell yesterday?

Possible time here fed.

Ultimately, what does this mean for equity markets here in the short term?


Well, I think investors are discounting a very easy process.

Miraculously, they think, inflation will fall without causing or slowing the economy too much to cause a recession.

They think the Fed is going to be able to cut rates wonderfully and keep a slowing economy from moving into a recession, which I think there was some indication on the other side this morning, jobless claims that rose in 242,000 ongoing claims are higher.

And so for me, at least history would show that it’s usually not an easy process.

The Fed is having trouble slowing inflation without triggering a recession.

And to me that’s where we’re looking at is right now, the good news on the inflation side, does that mean the economy is slowing down or not?

Which I still think means the economy is slowing and it usually takes a while for the feed rate cuts to actually work their way into the system the way the feed rate increases you’re seeing now do.

Do you think we are still heading for a recession?


I do.

I mean, I still think it’s the most likely outcome.

It’s certainly stretched, but there are parts of the economy that are already faltering.

The low-end consumer is being hurt by credit card and auto loan debt.

For me, the big question has always been, can rates come down fast enough to offset the impact of the rate hikes that are still working their way through the economy.

If you think more about the commercial real estate market, the longer we go with higher rates, more and more properties are selling at huge discounts from where they were, the longer rates stay higher.

Consumers continue to weaken under the impact of higher credit card and car loan rates.

And so I, I still think you’re likely to see a recession.

Um It’s never happened at least in the past without being like this, this time it might be different but I don’t think so.

So Brendan, what are you advising investors to do now is the time to say hedge.

Where, where are you seeing those opportunities?

Yeah, that’s where I think you all say the market is moving higher.

But do you all understand that over the last three months, this quarter while the S and P are up, every other part of the market is down and the S and P are driven by the mag seven which are up 17% while the rest of the names S and P 100 or 93 are actually below 2%.

And so it’s a very dual economy.

It’s a dual market for me.

Market shares represent the value of the value is not, be a very good tool of time.

Um It’s not an instant gratification trade, but I, I think fixed income provides value even though I think um you might have to have higher rates to get that recession.

I think if you look at the 10-year Treasury, for example, I don’t think people understand that if it goes up 100 basis points.

In one year, you only lose 2% over the next year.

If it falls 100 basis points, which I think is more likely for a recession, you get 12% total return small midcap stocks trade at a tremendous discount to the S and P 500 which trades at 24 times historical earnings or earnings 12 months and 22 times 4, 12 months earnings, which are expensive.

And so I think there are opportunities for investors.

Unfortunately, they are not in the places people are looking for right now.

And, and so, as we’re thinking about portfolio highlights, what what, what’s the playbook that investors should adopt if they haven’t already, in line with what you just mentioned and some of the opportunities that are out there and , and perhaps the areas they should rotate from have already seen the increases or benefits.

That’s the hardest thing to do because it can take a while when you have a certain part of the market that’s really tight, driving profits and people want to pile into it.

And if you look, historically, every economic cycle has had different leadership.

And so an economic cycle from recession to recession, to start the beginning of the next recession, at least going back to the 80s.

Each economic cycle, different leaders and leaders of the previous economic cycle usually become laggards.

Think of Japan in the eighties, it took them 34 years to make new highs think about technology in 2000, it took 17 years for them to make new highs think of China in seven, it’s still half of what it was.

And so for me, the biggest risk I think is that investors are tempted to focus on a certain part of the market.

I think valuation matters, not necessarily in the near term, but in the immediate term.

Uh and I think diversification still works despite the narrative that I keep seeing more and more to the contrary from the media and the articles that are out there, Brent Schutter, who is Northwest Wealth Management’s Chief Investment Officer and Chief Investment Officer, Brent .

Great to see you.

Thank you so much for taking the time to be here today right after the opening bell.

Thank you.

#headed #recession #cooling #inflation
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