Market outlook for 2022: 'Focus on things that have real earnings value right now'

Brent Schutte, Chief Investment Strategist at Northwestern Mutual Wealth Management, joins Yahoo Finance Live to compare the worth of growth and value stocks, where to find value as stocks in sectors like technology begin to slide, and large and small-cap growth.

Video transcript

KARINA MITCHELL: I want to stay on the markets, bring in our next guest now, Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. Brent, thanks so much for being here today. I'm sure it has been a really busy start to the year for you. I just want to get your market reaction on what you see happening today, another leg down for the NASDAQ, the 10-year touching 1.8. Yet, JPMorgan chief Jamie Dimon just coming out a few minutes ago and saying that he thinks we can expect to see the best economic growth in decades and that we will have more than four rate hikes this year. Your reaction to all of that.

BRENT SCHUTTE: Yeah, and I heard the opening. And I'm not for sure I qualify as Dr. Market, but I agree with Marco. I do think you still have pockets of the market that are value oriented that represent value. And so if you think about the past few years, you've had these market oddities that have really grown on the back of excessive or really large monetary and fiscal policy. Now monetary and fiscal policy are beginning to normalize, and things like hopes, dreams, themes, and meme stocks are falling because their earnings are pretty far in the future and dependent upon people wanting to take risk.

We have been talking about that normalizing. Growth is expensive as it has been relative to value since the 1990s. Same with small versus large. And I think as you think about 2022, you're still going to see strong economic growth, but monetary and fiscal policy will be less accommodative. And you want to focus on things that have real earnings value right now. And certainly those are cheaper stocks that we've continued to favor.

ALEXIS CHRISTOFOROUS: So, Brett, what do you do with the high growth stocks and the big mega-cap names? I mean, are they going to get squeezed because of higher inflation and because of the higher interest rates? Or you know, are they really the only game in town if you're looking for some sort of meaningful return in this market?

BRENT SCHUTTE: No, no, no, I think the meaningful returns happen more in value. So there are stocks that are out there that are still cheap, and those are the ones that you want to own. They actually have earnings growth that is real, and their margin of safety is bigger in the near term. I don't think those big tech names are done forever. I just think they're due for a pause. I think as you move throughout the first half of the year, I think the inflation worries that are out there now become less big. So I think inflation will roll over as supply chains normalize, and you're already beginning to see some of that.

Last week's ISMs, for example, saw the prices paid on the manufacturing go down. It saw the supplier delivery times go down. It saw that on the services side also. And so I think that as you move through the first half of the year, you will see those begin to push lower, which will pull back some of these Fed fears, which will eventually enable those stocks to move higher. But I just think in the here and now, you want to own what is cheap and what has been out of favor for years.

KARINA MITCHELL: And then so in that case, I'm wondering, what do you think of small caps at the moment, in particular? And then which sectors do you like? For example, is healthcare something that you would look at?

BRENT SCHUTTE: Yeah, so we still like small caps. We think small caps are still leveraged to economic growth, which we do believe is going to still be strong. And so I agree with what Jamie had to say there. I do think you will see strong economic growth in 2022, which will support small caps. And then from a valuation perspective-- and I brought it up in the opening-- I mean, some of these are as big of differences as they have been historically-- small trades at cheap relative to large. Valuation hasn't mattered for the past couple of years, but as interest rates rise this year, valuation will matter more to investors. And that's where I think small caps have the ability to take advantage of both of those.

Plus, most people are still overexposed to large caps. And they still believe that is, as you mentioned in your comments, the only path forward. It is not. There are still other parts of the portfolio that you should be focused on. And small caps certainly fit into that.

ALEXIS CHRISTOFOROUS: What about focusing on those emerging markets? And particularly, I'm thinking about a larger one, which is China. Do you have exposure there? And how much should investors allocate their portfolio for those emerging markets?

BRENT SCHUTTE: Yeah, we still have exposure there. The markets that we like more are still based on the international developed markets. And so places like Europe, where they're not tightening aggressively, versus places like China, which has some oddities based upon real estate and things of that nature that may be a bit in trouble here in the near term. Certainly, emerging markets are cheap. We don't want to ignore them. But we'd rather focus our marginal dollar on international developed, such as the eurozone, where hopefully they're going to emerge from COVID at some point, just like we are. And they will have stronger economic growth. And their valuations there are, I believe, as cheap as they've been maybe at least in decades.

KARINA MITCHELL: Brent, a lot of just average regular folk out there watching as well. And, you know, we know these rate hikes are coming, whether they're three, four, or more. They are coming. What should the average person be worried about now? What action do they take now, if they have, for example, credit card debt, mortgages, and things like that?

BRENT SCHUTTE: The good news is the average consumer is in pretty decent shape relative to where they were back 10, 15 years ago. And so, overall, I think that's good news. I mean, certainly as the cost of debt rises, one wants to make sure that their debt isn't as large because that obviously equals higher payments.

But in general, overall, the consumer is in a decent place. I think the thing that I want to focus on here is that I want investors to not be overloaded on those names that have done so well the past few years that they all believe are the only path forward. We have decades of-- large cap growth, for example, has outperformed for decades-- or not decades. It's outperformed for the last few years. And people are over concentrated in that area.

I don't want them to abandon it. But I also want them to remember that diversification is a very, very powerful tool and that they should still have exposure to value names, to small cap names, to international names. I just know that the temptation for investors to invest with a rear view mirror focus is really high. And they need to invest looking forward. And that forward is going to look different from the past. And that means that change in leadership that I'm afraid that investors are over their skis on the other side of that.

KARINA MITCHELL: All right, that is really pragmatic advice. Brent Schutte, we'll leave it there. Thank you so much, chief investment strategist at Northwestern Mutual Wealth Management.