In This Article:
US stocks (^DJI, ^IXIC, ^GSPC) are rallying Monday morning following US and Chinese officials agreeing to a 90-day cool-off period on their respective tariffs.
Northwestern Mutual Wealth Management Company CIO Brent Schutte explains whether now is the right time for investors to buy into the FOMO (fear of missing out) trade — especially in small-cap stocks — and where volatility may fit into forecasts in the coming months.
To watch more expert insights and analysis on the latest market action, check out more Morning Brief here.
It's time now for today's strategy session. The FOMO trade taken hold on Wall Street with investors piling into stocks to avoid missing the market rebound. So, should you chase the market rally? Joining us now on that, Brent Shoody, Northwestern Mutual Wealth Management company's CIO. Brent, it's always great to speak with you. So, what are you telling clients today? Do they buy into the rally?
I hope they didn't sell into the falling of the market. So to me this is a lesson and why you shouldn't try to market time, especially when it's predicated on trade negotiations which are fluid. This is why you pick a strategic asset allocation, working with an advisor, you stay true to that asset allocation and you don't panic and sell when other people are selling, and therefore you don't have to chase and buy on the upside. And so to me, if you were uncomfortable during the past 30 days with your allocation, you should revisit that right now and make sure that you're comfortable going forward, because I'm likely to believe they're going to be back and forth in the future, and that we have not heard the end of the trade negotiations.
Brent, I'll take it one step further here. Do you buy just because the president says buy stocks?
No, you take a look at longer term fundamentals and you pay heed to those and certainly there are opportunities, I think, in the market today. Small and mid-cap stocks were not mentioned in your opening there, those are trading to the upside today quite heavily because they are more economically sensitive and they are cheap. If you are longer term investors you should focus on markets that are cheap, you should remain diversified, and to me small and mid-cap stocks right now are an area that investors have ignored because they have become fascinated with large cap US stocks only. This is where there are opportunities for people willing to think outside of that area and look three to five years out. And I think small mid-cap stocks are a perfect place for investors to make sure they are diversified and not just in the US S&P 500.
So do you like small and mid-cap over tech at these levels?
We like small and mid-cap stocks, they are our favorite asset classes moving forward. We also like international stocks, I think people got a lesson in international stocks not being dead. If you look at the international market, they're actually up 12 to 15% this year, which is a surprise I think to many investors. And that is an area that I think still has legs going forward because of nothing else, foreign economies have learned they need to stand on their own two feet and they're going to be doing more domestic stimulus, like in Europe, to help their economies push along also.
How how is this year kind of, I don't know, just shifted the entire mindset around what a defensive play for your portfolio is?
Well, I hope the entire year is bringing back diversification. To me, if you look at the last couple of years, we had an extremely concentrated market that has unfortunately, I think, sucked investors in just to that narrow area. And at least in my history and my time of doing this for the past 30 years, diversification is the one thing that works. And so I would remain diversified, make sure that you own small and mid-cap stocks, make sure you own some international stocks, because the future is still uncertain, and the way that you deal with uncertainty is not by being defensive, but by diversifying across different asset classes because that is admitting that you don't know exactly what's going to happen, which certainly I think we've all seen happen over the past 30 to 60 days.
Yeah, how much volatility should traders be prepared for in the next 90 days amid this pause, and how should they potentially hedge against any of that volatility?
Yeah, I mean I think you're likely to see, I think, a lot of questions answered in the next 30 to 60 days, especially on does the soft data leak into the hard data. And so you mentioned getting CPI tomorrow, we also get retail sales. I mean there was an economy that was later in the cycle that we were coming into this. It got hit by tariffs, we'll see how much that actually impacts the hard data going forward, which is kind of going to drive trade I think in the next few days. And then the tariffs are going to be back and forth. I don't think this is the final resting spot for tariffs. We're likely to end up with overall effective tariff rates in the low teens, which is still higher than what you've seen in the past 80 to 90 years, which will likely have an impact on inflation and economic growth going forward, both probably in the opposite direction of what you'd like. And so therefore I think there's going to be much more volatility over the coming months as we kind of sort through all the different issues that are still out there.
