- Northwestern Mutual’s chief strategist Brent Schutte is most bullish on more cyclical stocks.
- He shared with Insider the five areas of the market that he likes the most for 2021.
- He also collapsed on why he believes tech stocks are not going to crash like they did in the dotcom bubble.
- Visit the Business Insider homepage for more stories.
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Brent Schutte doesn’t exactly like the mega-cap tech stocks that power the market.
Their valuations are astronomical compared to the rest of the market, and as their multipliers keep rising, the calls of a developing bubble get louder.
Northwestern Mutual’s chief strategist winced even at the rampant speculation. “I’ve made my fair share of comparisons with 1999,” he told Insider on Jan. 19, citing the dot-com bubble that eventually burst.
Although valuations are high, there is one key difference between today and the 1999 boom that justifies the price of technology stocks and means they won’t see a massive crash: government bond yields, according to Schutte.
“In 1999 the 10- and 2-year treasury was 6%. Today they are 25 basis points and 1%? So the competing asset class is low and the central bank is trying to keep it there,” he said.
Still, Schütte said market conditions, three of them in particular, are conducive to a gradual rotation of technology stocks into more cyclical areas of the market.
Just like the monetary policy of the
Growth stocks help lead the market, he said the bank’s forward inflation guidance is good for cyclical stocks.
“They put their credibility on getting inflation above 2% and they have to,” he said. “And that’s why they’re not going to quit early. I suspect they’ll keep rates low and keep buying some kind of bond.”
Then there is the fiscal side. Schutte said the high likelihood that Congress will pass another stimulus bill will support cyclical values. He added that the chance of tax hikes was slim for at least most of this year.
“We will get another aid bill,” said Schütte. “I don’t think you’re talking about tax hikes, if at all, until later in the year because there are a lot of Democrats in the house running for re-election in wealthy suburbs in 2023.”
Third, Schütte said that robust consumer savings will benefit cyclical values when the economy reopens fully.
“If you add that up to what’s on the consumer balance sheet with all the savings that are out there, you see a pretty strong year 2021,” he said. “You will have a market that has a different lead and is more geared towards broad economic growth in the early cycle.”
5 sectors for 2021
Within cyclical stocks, Schütte says he likes five areas of the market in 2021, given the three factors above.
Two of the sectors are little hat and Mid-cap stocksthat tend to follow economic cycles and are therefore on price gains when economic growth picks up.
Investors seeking exposure to these stocks might consider exchange-traded funds like the Vanguard Small-Cap ETF (VB) and the WisdomTree US MidCap ETF (EZM).
Next, Schütte said that he is optimistic Emerging market stocks.
“You have broad global economic growth and a federal reserve that will try to keep interest rates low,” he said. “Historically, this is a recipe for success for emerging markets.”
He added, “If you buy the asset class as a whole, you get a whole piece of China. We still think this is a decent place for broader asset allocation. “
Those looking for exposure to emerging markets can consider the iShares MSCI Emerging Markets ETF (EEM).
Finally Schütte said he liked Industry and Finances, two sectors that are known to be more cyclical and benefit from early cycle activity.
The Fidelity MSCI Industrials Index ETF (FIDU) and the Vanguard Financials
(VFH) offer a commitment in these sectors.