Northwestern Mutual’s Schutte: Diversification Key Amid Fed Uncertainty

Brent Schutte, Chief Investment Officer at Northwestern Mutual Wealth Management Company, said investors should prepare for multiple potential outcomes as the Federal Reserve weighs interest rate cuts against persistent inflation and a cooling labor market.

“The combination of high inflation and increasing unemployment threatens to violate both sides of the Fed’s dual mandate of maximum employment and stable prices,” Schutte wrote in his latest weekly commentary note earlier this week.

He noted that recent data showed rising core inflation alongside the highest level of continuing jobless claims since November 2021.

Despite the tension between inflation and employment, Schutte said the Fed is increasingly likely to cut rates.

Citing Jerome Powell’s remarks at Jackson Hole, he highlighted that “the balance of risks appears to be shifting” and that Powell’s comments “appear to be giving the Fed clearance to cut rates even if inflation continues to rise in the next few weeks.”

Markets quickly adjusted, with the probability of a September rate cut climbing to 81 percent after Powell’s address. U.S. small caps led gains, rising 3.8 percent, while broader indexes advanced at least 1.5 percent.

Schutte cautioned, however, that investors should not rely solely on short-term trends or narrow market segments such as artificial intelligence, which he said is facing “doubts about the long-term viability of AI investments.”

“A recent report published by MIT’s NANDA initiative argues that for 95 percent of companies, generative AI implementation is failing to cause significant revenue increases due to flawed integration,” stated Schutte.  

The CIO argues for a broad-based approach. “Whether or not AI and tech stocks continue to lead the market higher, reports like this should serve as a caution not to invest only in narrow swaths of the market,” he wrote. “The solution is the same as it has always been: diversification among a wide range of assets, guided by your unique financial plan.”