Want to bring in Matt,
stucky senior portfolio Manager of Equities
at Northwestern Mutual wealth Management.
Matt, thanks for joining us this morning.
What's your take on how the markets are moving in the first few moments of trading,
especially since we saw, you know, them ending up, you know, positively yesterday.
Well, good morning Chloe.
Um, you know,
this isn't all that unexpected given the strength we've
seen so far this year in the equity market.
And uh, you know,
just add to it some of the strength you've also
seen in the economic releases specifically around employment and also,
unfortunately around some of the strength and pricing, both in the C.
P. I. And and and in the P. P. I. Number this morning.
Really,
the takeaway is that the Federal Reserve is going to have to go higher
and remain there longer than what we expected when we first started this year.
And so, you know, the volatility on the,
on the up and down is probably to be expected from here.
Yeah, thanks for breaking some of that down with us.
Of course, as you mentioned, it's been a big week for economic data.
What's your main takeaway? And as you said, you know, we might have to see
these rates elevated for a longer period of time. What's your outlook on that?
How long will these rates remain elevated?
How many more hikes can we anticipate here?
Well, uh, it looks pretty certain that we'll see another hike in March.
Uh, and uh, we got to keep in mind though,
that we're gonna get a lot of economic data
between now and the subsequent Federal Reserve meeting,
but after March, which is occurring in May,
and so you'll get more inflation reports,
you'll get more labor reports between now and then.
But in terms of what's changed between when we started this year and today,
the prospect for the federal reserve easing by the end of the year is diminishing.
Um, and so, you know,
the outlook from here is that the federal reserve is gonna have
to go a little bit higher than what we thought um,
to start this year and they're going to have
to remain higher throughout the entirety of 2023.
Um, and, you know,
some of the optimism that's been building into
markets about the prospect of a soft landing.
You know,
we think we start to question that a little bit if the Federal Reserve has to go
higher and stay there longer than a lot of
investors expected when we first started this year.
Yeah, matt.
And given that you're saying the likelihood of a soft landing is pretty low here,
what are you actually anticipating instead?
You know, we're gonna, in our opinion, see some form of a mild recession, look,
you know, for for the likelihood for a soft landing to occur,
you have to see some form of a stabilization occur in
housing and really the leading indicators of housing are affordability.
It's building permits and both of those have a lot of room
to fall to get back to levels where you can say,
okay, housing is in an area where we can see some stabilization.
Um You know,
the United States economy is uniquely dependent
on strength of the housing market and
right now it continues to be um in a recessionary kind of regime.
Unfortunately, now, matt,
what's it gonna take to reduce inflation to the desired range,
particularly in services that are elevated right now,
it's gonna they're gonna unfortunately have to be a little
bit more labor slack um occur in the U.
S. Economy before we see some services inflation starts to subside.
Um We've made a lot of progress on the good side of inflation.
We're gonna see some progress made throughout the rest of this
year as it relates to rent and housing related inflation.
Um But the services um and the so called super core inflation
remains pretty sticky.
Uh And a lot of that just has to do with
the strength and resiliency that we've seen in the labor markets.
And so it's going to take some time uh
and some loosening in labor market conditions until ultimately,
ultimately, you see services inflation.
X.
Housing start to start to cool off to levels where the Federal
Reserve feels like they can they can stop pushing interest rates higher.
Finally, what's your investment strategy at this time?
You've said you're favoring small and mid cap stocks. Why is that?
And how would you advise investors at this point?
You know,
we're fairly balanced as it relates to just overall aggregate
risk types of positions relative to high quality fixed income.
But within the riskier parts of the investment portfolio or the equity positions,
we do favor small mid cap positions.
And the reason for that is simply due to a combination of valuation and some some,
you know, reality already priced into the forward earnings outlook.
You know,
the small cap index trades about 14 15
times forward estimates for earnings for 2023.
And those earnings numbers have already been haircut, 15 20%.
Um That's a pretty uh that's a pretty nice size haircut and a pretty
dislocated valuation versus historical levels against S
and P 500 types of valuations.
And so,
you know,
you get the opportunity to own small cap equities at a
discount and if we do indeed get a soft landing,
we get a mild form of recession on the outside of that downward move.
Um Small caps,
mid caps tend to be a little bit more cyclical and
so you get the upside in a recovery as well.
All right, matt, stucky from Northwestern Mutual.
Thank you so much for your time this morning.