Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Company, joins Cheddar News. 

Stock Open Mostly Higher Ahead of Earnings 

joining us now to discuss all of this is Matt Stuckey, senior portfolio manager at Northwestern Mutual wealth management company. Matt, welcome to the show. Thanks so much for joining us, the first half of last week did bring a relief rally that pushed the S and P 500 more than 5% of its largest two day gain since 2020. But that was followed by a couple of days of big losses. Do you expect the volatility to continue this week? Well, good morning. Thanks for having me on the show and we do expect volatility remain elevated. You referenced last week how you had a surge in equities to start the week and that was met with a sell off to to end the week. And really what the market's been doing is trading off any and all type of inflation information that uh that is causing investors to either think that the peak is in in hawkishness or that with hotter inflation prints or stronger economic data that you know, we have likely more pain in front of us in terms of additional hikes from the Federal Reserve. And so as the incoming data look to be stronger or weaker than expected, we expect that volatility to continue Speaking of that incoming data, you know, looking to see what the Fed might do. Do you think the worst of this bear market is over or when do you expect to see it ending? Yeah, that's a good question, you know, we're we're well into this bear market bear markets on average, they tend to last about 12 months, uh, and peak to trough declines in bear markets around 30% or so. And so if if you kind of gauge the start of this bear market, the the highs that was set in January, we're we're into October already and so the 12 month mark isn't too far into the future now, it's just an average those, those numbers that I shared with you. Uh Really what we need to see is um inflation moving back under control. Uh That is the key to the Fed starting to back off for markets to recover from the economy to to set off into a new expansion. Uh And so as as as the incoming data confirm that, I think that's the data point that we're gonna be looking at for for saying the bear market is behind us Now. We got a bunch of big names kicking off earning season. Of course we've got, you know, banks as well as consumer staples to what sorts of information are you gonna be looking to for earning season in Q3 and beyond. It's really all about the the Outlook Chloe earnings right now, they expect to be, you know, fairly decent as we enter into the third quarter. But this is also the time of year. We will start to get whiffs of what 2023 will look like for for companies And looking at where earnings have been trending in terms of estimates for 2023, we're in a negative earnings revision cycle right now and we don't know where the bottom is going to be in terms of where consensus settles out in terms of what what investors are expecting for for next year's earnings and updates from companies during earnings earnings season. That helped to confirm directionally where 2023 is headed is likely to be the biggest driver of company specific performance as we get into earning season. So what do investors need to be watching ahead of the C. P. I. Report on thursday and what are you telling your clients about that? Yeah, good question. So we do have a C. P. I. Report coming out this this thursday. Um There's really right now a couple of dynamics happening with inflation inflation is very elevated as we all know, but there's a couple of interesting things happening with with inflation and it's really kind of this two ships passing in the middle of the night scenario on on one hand, goods inflation is rapidly coming down. Uh You don't have to look too far to see inventories outside of autos swelling. Uh And so what that's doing is leading to lower prices for consumers and we expect that to continue. So, good inflation is on its way down. However, services inflation, which is a bigger component of C. P. I. Is still strong and is likely actually to to move a little bit higher and the reason for that is simply due to housing housing enters into services, inflation with about an 18 month lag. And so what's showing up the numbers today is the housing market that we had in 2021. Now it's a dramatically different housing market today. In 2022 you have mortgage demand that's off 37% from where we started this year and month on month gains in the housing market. Our history, we went from a 1.5 to 2% month on month gain environment from the end of 2020 up until the beginning of this year. Now we're We're looking at housing price declines across the board as affordability of stress interest rates are higher and as I mentioned earlier, mortgage demand has fallen off a cliff. Absoluteing going to make an impact there. Now I want to talk about jobs because the US economy added 263,000 jobs last month which was stronger than expected and stocks lost steam as a result on concerns that the Fed will continue with aggressive rate hikes. So what do you think? Do you expect that to continue here? Uh We we do expect that the labor market will soften from here. We're seeing that in terms of jobs opening starting to starting to trim lower. And remember uh the employment markets are a lagging indicator for the overall economy. Uh It tends to be one of the last parts of the economic data that we follow to to show up in terms of strength or weakness. And so while the economy has, has started to decelerate pretty rapidly throughout the summer, we haven't really seen that catch up yet to the labor markets, but it's inevitable that eventually it will show up. Um So over the next couple of quarters, we expect those gains to start to move lower. Now, I want to talk about, you know, now in the end of the year, we're heading into the holiday season. What are you looking ahead to? What could possibly go wrong in the economy between now and then? Well, there's a there's a number of things that can always go wrong. Uh you know, I I think the one you always you always have to throw out there is geopolitical risk. And right now, that's certainly elevated with the war in Ukraine and what what's happening in terms of the energy markets and and the and the food markets as a result of that. Um You know, the other risk that we see is that the policy made by the Federal Reserve, if the Federal Reserve continues to look at back, we're looking inflation data instead of for looking forecast. Um the risk is that uh monetary policy is too tight for too long and the risk of an economic accident in terms of a deeper recession uh than than what's currently necessary, in our view to bring overall demand back in balance with supply uh, to get inflation back under control. We think that's that's a big risk to is that the Fed doesn't doesn't pause or pivot away from what we see, what what would be necessary for inflation to be under control. Matt, thank you so much for your time and your insight this morning. That's Matt Stuckey, a senior portfolio manager at Northwestern Mutual wealth management Company.