While not the only factors, two of the major forces impacting the economy are the coronavirus and who will be sitting in the White House come January. With science and politics meeting, economist Hugh Johnson, the chairman and chief investment officer of Hugh Johnson Advisors in Albany, is predicting that the current V-shaped economic recovery will slow.
Johnson spoke with WAMC's Jim Levulis about his latest economic outlook.
Johnson: When you take a look at what happened in March and April, and of course we dug an extraordinarily deep hole in March and April, and it showed up in the second quarter gross domestic product numbers, which was a 32% decline in gross domestic product, by far the largest or steepest decline we've ever had in our history. So we dug a deep hole. And initially, there was a very strong sort of a recovery from those very deep numbers, those very poor numbers, and that we saw in May and June, particularly in the employment numbers in one month, we saw 4.8 million jobs added or recovered into payrolls. And so that was all really good news. But I think that, you know, since that time quite frankly, that everybody's been a little bit worried about a number of things. First of all, the stock market has come very far very fast, and they're a little worried about that. The second thing that most everybody is worried about is that we're going to have a sort of a replay of March and April that we're going to roll back some of the reopenings and as a result, the recovery that we had, and again, May and June being very strong with slowed down. So the recovery in May in June was very steep and V-shaped. And after we get that we get into something like July, August, the numbers we've seen so far. And it looks like there's still a recovery going on. But it's a little bit more gentle. So what does it mean? It really means good news, in the sense that we're still recovering, maybe not such good news in the sense that we're not recovering as fast as we did. And it's going to take some time. And I mean time until 2022, to get back to the levels of employment and economic growth or output that we saw at the end of 2019. So positive growth, but slow growth. And that's good news for I think the markets but maybe it's just not as exciting, shall we say as when you get something that's V-shaped.
Levulis: The S&P 500 has been hovering around its record high, which was set before the pandemic hit. Your outlook predicts S&P 500 earnings will increase nearly 30% in 2021. That's after declining 23% overall in 2020. What's pushing that index to be able to recoup its losses relatively quickly?
Well, the big thing that is pushing the index is that investors know that what's where we are doesn't count. And where we are, of course, is in 2020, in the middle of the pandemic, in the middle of the kind of the bad times for the economy, and earnings are going to be down 23%, but nobody's really looking at 2020. Now we are all looking are focused on 2021 and asking the question, what are the earnings going to look like, not only in 2021, but also 2022. And, as you say, that's a positive growth of 30% in earnings for the S&P 500. That's really good news and that's very positive news. And, there's no expectation of anything that's going to get in the way of that. In other words, we're not going to see interest rates rise, the Federal Reserve is likely to keep interest rates right around current levels, which means a supportive of current valuations in the market. So I think really what we're saying is that look, you know, the Federal Reserve interest rates will be very benign, they're not going to get in the way, this was all going to be up to earnings. And the earnings outlook is very positive for 2021. And a little less positive, but still positive for 2022. And that's what investors are focused on. And that's why they're somewhat optimistic. It looks like a new bull market. And the one thing I want everybody to remember is bull markets are not short….they last on average about 63 months. Last one we had was my gosh, was 130 months, but generally speaking around 60 to 65 months. That's a long way from here. We're only two months into this. So I think investors are saying, look, it's a reason to be upbeat about things or prospects not downbeat.
And sticking with Wall Street here, your outlook seeks to compare the current stock market with the “dot.com” bubble of 1999-2000. Are you seeing similarities between now and then?
Well, I'm seeing similarities in the sense that one of the things you focus on is the level of valuation. And we had, you know, we've got price earnings multiples of about 22 now. We had higher price earnings multiples at that time. But one thing we've got now that was really different from “dot.com” is that we've got extremely low interest rates, and we didn't have very low interest rates during the “dot.com” bubble. And so it was hard to justify those valuations, hard to justify those very high price earnings ratios in the “dot.com” bubble of 1998 through 2002. This time, you can justify the high price earnings ratios and I draw that comparison mainly just to show you to make a statement and the statement is, you know, you just shouldn't worry about this being a bubble like the “dot.com” bubble, you shouldn't worry about valuations now, as you should have worried in 1998 through 2002. So it really takes that big worry about valuation kind of off the board. You kind of worry about it, but you don't worry as intensely as you should have worried back in 1998. That's the reason I say it.
And from Wall Street to Pennsylvania Avenue, we are less than three months away from the presidential election, if former Vice President Joe Biden were to win the White House, how might that impact the economy?
That's really a great question. And I think you're going to have to say, you know, the truth is regardless of who wins I'm not sure it's going to very much affect the economy. I don't think we're going to go into a tailspin as a result of it. The thing you worry about, of course, is that look, we're spending a lot of money right now on the pandemic to try to get ourselves out of this crisis. And that's going to show up in a very big increase in the deficit. It's going to go for about 4.5 percent of gross domestic product up to as much as 18% of gross domestic product, when we've seen that historically, it's ushered in a period of sort of fiscal restraint, and that means higher taxes and less spending. I think if we're talking about sort of a Democratic victory, which right now that looks like a real possibility, maybe more than just a possibility, but I think we're really saying, yeah, higher taxes, higher corporate taxes, higher taxes on the wealthy, less sort of freedom of regulation, there has been a very long period of unregulated anti-trust, anti-trust is going to be much tighter and tougher during a Democratic victory, but at the same time I think you're going to see all that offset by ongoing very strong spending, lots and lots of spending, particularly on things like infrastructure. And I think that the bottom line is that yeah, we'll get the restraint of hierarchical but we'll also get the good news, I think it's good news in the form of maybe ongoing increased spending on things like infrastructure that are very important, as well as all sorts of things like, like healthcare. So, quite frankly, I don't think it's going to have that much of an impact on the economy, but it's going to really change the way things are done in Washington. Higher taxes on the rich, higher taxes on corporations, we're going to roll back that corporate tax from 21 to 28%. It's almost a guarantee. So things will change.
Stepping back away from current events for a second…historically, why are the economic predictions for a Democratic White House worse off than say, a Republican presidency? I know you mentioned high taxes, more regulation, that sort of thing…. historically has that held true, those predictions?
It really hasn't held true. It has certainly has held true that we've had the predictions that the Democrats bad for the stock market and bed for the economy. But when you take a look at the outcomes, whether it's a Republican or a Democratic presidency, really, quite frankly, the outcomes have been mixed. In other words, they've been very good for Democrats and they've been very good for Republicans. So it really depends on which Republican it is, which Democrat it is, and what their policies really are, because their policies will determine the outcome. And right now, when we look ahead towards 2021-22, you have to be a little bit worried because those deficits are so high, you have to be a little worried that that's going to usher in not only higher taxes, but less spending. But when we take a really close look at what Joe Biden has said for the Democrats, he's really talking about not lower spending, but a little bit higher spending. But in either case, I think it's really a little bit up in the air and yes, you should be worried. Yes, you should be worried about fiscal restraint, but I think it's a little bit too early to say that the economy is going to somehow go into a tailspin in 2021-2022. So I think we got to watch very carefully for what the policies are going to be the incoming administration, either the existing one continues, or the new administration comes in with new policies, you got to watch them very carefully and try to measure what the outcome might be. It really makes a difference.
