A top investment chief explains why bonds offer an attractive hedge for a mild and brief recession in 2023
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Phil Rosen
Jan 21, 2023, 20:18 IST
Northwestern Mutual
The name's Bond — long-dated bond. That's my attempt to simultaneously lure Daniel Craig as an Opening Bell reader and also preview today's newsletter.
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I'm senior reporter Phil Rosen, and below I'm sharing my conversation with Northwestern Mutual's chief investment officer, Brent Schutte.
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Brent Schutte is the chief investment officer at Northwestern Mutual. This conversation has been lightly edited for length and clarity.
Phil Rosen: You said you're expecting a mild and brief recession this year. How should investors position themselves for that landscape?
Brent Schutte: The good news is that the bond market has repriced, and the bond market is a hedge against that recession. And so I'm fearful that a lot of investors are kind of hanging out in shorter-term bonds, because they yield more right now than longer-term bonds.
But investors have to think about whether they want to earn 4% or 5% on a corporate bond for 10 years, versus renting something for a couple years that will reprice. And who knows where rates are in that time period?
In October last year, Northwestern Mutual pushed more toward longer-term bonds. We added to our fixed-income to prepare for the narrative shifting from inflation worries to recession worries.
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What parts of the stock market look attractive?
BC: I do think earnings will come down this year, and cheaper equities give a margin of safety against that.
We like international stocks. You're going to get a tailwind of a falling currency, and they're incredibly cheap relative to their US counterparts. And we like the S&P 600, which is our version of small-caps. It has a high quality bias, it traded at 12 or 13 times earnings.
People talk about how the market overall is too expensive and therefore it must fall, so I think focusing on those cheaper parts of the market are the ones that will continue to do better in 2023.
If the Fed were to achieve a soft-landing, how do you think it would happen?
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BC: I think the only way you get that vaunted soft landing is if people come back into the labor market, because right now the Fed believes the labor market is way too tight. The only way to change that is by causing people to lose their jobs, or bringing more people back in.
The participation rate today is still lower than what it was pre-COVID. There's possibly some people who would come back, but unfortunately a lot of those people got early retirements.
The fulcrum point at which you get a soft landing would be if you saw labor supply come down.
And here are the top stories from markets this week:
1. A BlackRock iShares strategist said there is a reckoning coming to investors who don't adjust to a brand new investing playbook. Karim Chedid is expecting the Fed to hold interest rates above 5% for all of 2023, and in this scenario, she said "Goldilocks doesn't save the day."
2. These 33 stocks are poised to benefit the most from falling inflation. That's according to Credit Suisse strategists, who said this batch of names will rally even if corporate earnings decline. See the full list.
3. Sam Bankman-Fried still believes that FTX's US customers can be made whole. The ex-crypto chief this week doubled down on his claim that the US branch of the exchange "was and is solvent." But the new bosses led by John Ray III aren't convinced.
5. Shares of the energy drink brand Celsius plunged after Flo Rida was awarded $82 million in a lawsuit. The company was forced to pay the rapper for breach of contract. Get the details.
7. Meet Sam Trabucco, the Alameda Research executive who oversaw the development of the firm's ultra-risky trading strategies. He worked as the co-CEO of Bankman-Fried's hedge fund, but stepped down a few months before its collapse. But he left only after going on a $10 million all-cash property buying spree and snapping up a 52-foot yacht.
9. "The market is built on a bedrock of total complacency," a former top TD Ameritrade technical analyst said. Investors shouldn't be betting on the Fed to shift to dovish policy this year, he said, but a more likely scenario is for stocks to crash another 20%.
10. The fraudulent practice of wash trading accounts for 70% of trades on some crypto exchanges, according to a recent study. It entails firms trading with themselves to boost prices artificially, and could help attract inexperienced investors. Here's what three experts had to say about the market manipulation practice.
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