‘Investors are still misunderstanding the Fed,’ says chief investment strategist

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The stock market still has room to function this year despite growing investor concerns about inflation, according to Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Company. “I think investors are still misunderstanding the Fed,” Schutte told MarketWatch in a telephone interview on Tuesday. “The Fed is not adjusting anything, even if we have inflation in the next few months, until they make up for all the losses and more on the employment side.”

Even after last week’s strong labor market report and Monday’s positive economic data from the Institute for Supply Management, Schutte hopes the Federal Reserve will allow inflation to rise as long as it sees that gains can still be made under its employment mandate. . That leaves him feeling optimistic that the stock market could continue to rise this year, albeit potentially at a slower pace. Small-cap, mid-cap, and RLV value stocks, -0.03% will likely continue to lead stocks in the growing economic recovery that is being driven in part by the launch of the Covid-19 vaccination, according to Schutte. But while value stocks remain relatively cheap and small and medium-sized companies are poised for further earnings growth, he expressed concern that individual investors are not positioned to capture the gains related to the economic rebound. “I am concerned that many retail investors have gorged themselves on growth and technology stocks,” said Schutte, explaining that they risk losing investment returns from the value, small- and mid-cap turnover that he expects to continue. . Read: S&P 500 holds on after hitting record as investors weigh infrastructure plan The current economic expansion is one where “we actually do worry about inflation eventually,” he said. But while inflation will cause more volatility, Schutte is not overly concerned that it will “drastically” change fiscal policy or the Fed’s stance in the short term. “The strap is a little bit longer on the employment side than I think people realize,” he said. “That’s what the Fed is focusing on.” Schutte believes that the central bank would welcome some inflation, as its target is 2%. “You still have more room before you have to worry more,” he said. The Fed will likely not rush to raise interest rates for fear of “shorting out the economic recovery” underway in the pandemic, particularly with millions of Americans who have retired from the workforce, according to Schutte. And in his view, the recent Treasury sell-off reflects a strengthening of the US economy, noting that 10-year Treasury yields remain relatively low from a historical perspective. The yield on the 10-year Treasury note was TMUBMUSD10Y, 1.656% 1.66% on Tuesday afternoon. Still, Northwestern Mutual’s chief investment strategist believes investors would do well to have some hedge against inflation in their portfolio. He suggested buying basic products, for example.