Every so often we check in with economist Hugh Johnson, chairman and chief investment officer of Hugh Johnson Advisors in Albany. With more sectors of the economy reopening from coronavirus shutdowns but cases rising in many states, Johnson has released his latest market outlook.
WAMC's Jim Levulis spoke with Johnson about his views on the economy.
Levulis: Hugh, you state in your outlook that the bull market of 2009 to 2019 ended, it was followed by a short bear market and we are now in a new bull market and economic recovery. What leads you to believe that?
Johnson: Well there are a lot of things that lead me to believe it. I think right at the top of the list, though, as you look very carefully at the performance of the financial markets collectively and I mean, not just the fact that the since really late March, the stock market has been up about 45%. But also you look at what investors are doing, they're buying the so called bull market sectors, you see things like technology, consumer discretionary, basic materials, industrial stocks are at the top of the list and the defensive sectors, the ones that investors really buy only in a bear market utilities and consumer staples. They're there at the bottom of the list. So sector performance, you see that mid cap stocks, small cap stocks, performing very well. And then you move to this sort of monetary and economic numbers, you see all the stimulus that we're getting from the Federal Reserve and the federal government in Washington, that's leading to some real significant increases in bank lending and money growth and, and then the leading indicators for the economy leading indicators just tell us where we're going now, where we've been basically turning the corner and pointing higher. So markets are saying we're in a bull market, and it's confirmed by important monetary and economic variables. And I think you put those two together and, and you come away with a fairly positive feeling about what lies ahead both for the markets and the economy in particular.
The Nasdaq specifically has hit record highs recently. Since the Nasdaq is made up of mostly technology companies, what does that tell you about the technology sector and the resiliency of the U.S. economy?
It tells you probably not a whole lot more than the fact that things have changed for technology. And when I say things have changed for technology, I really mean things have changed for the better. It's not just hardware that really drives technology anymore. Technology’s a story really about software and security, and the cloud and a lot of different companies. They're not only not only is the business has changed for technology, companies, technology companies are different, but they're executing very well meaning they're coming very, very profitable. And then addition to becoming very profitable there, obviously, as a result of that, building some very formidable fortress, like balance sheets that got lots of cash, they've got very strong balance sheets. You know, it's basically the technology is different than it used to be. And so you really can't look at it in the same way. I keep talking about the fact if you're looking for companies that are doing more with fewer, fewer people that have become We becoming much less labor intensive. Just look at the names at the top of the list, like take a look at Microsoft. Amazon's a retailer, but I understand but it's really driven a lot by technology, Facebook, take a look at alphabet. Take a look at Apple. You see those companies are doing more with fewer. They're really, they're really benefiting from a less labor intensive, more knowledge driven economy. And it shows up in their balance sheet their income statements. It's really different. And I think that's why they're performing so well. Everybody sees things are changing technology isn't what it once was.
The federal government and the Federal Reserve have been spending or providing trillions of dollars in stimulus efforts. As you state in your outlook, the Congressional Budget Office projects the federal deficit will increase to $3.7 trillion or 18 percent of GDP – a nearly $3 trillion increase versus last year. What are the projected impacts of this deficit?
That's a big question. And the deficits getting very high. And we'll get, we'll get substantial. And the question what happens? What do we do about it? When it gets that high, sooner or later, you have to hate to use the expression pay the piper, we have to do something to get the deficit down to more rational levels, any household knows that. If our debt levels in a household get too high, we have to do something, increase our revenues, reduce our spending, do something to get deficits back down to levels that are, let's say, more manageable. So sooner or later that's one of the problems. What that means is a combination of higher taxes and less spending. Now, there may be a change in administration's that comes at the end of this year. We don't know the answer there. But even if there is a change of administration to store ordinarily, where we've seen historically, we get deficits that are over 5% of the economy in ordinarily invites some combination of an increase in taxes and a reduction in spending. I don't think a reduction in spending is on the horizon anytime soon. So I think we're really talking about some increase in taxes, maybe 2021, or late 2021 and effective in 2022. And that would not be good news for the stock market. Historically, it has not been good news. We saw that 1938 we saw that in 1946, when the Second World War ended. We saw it also in 1982, although the rollback in the tax cuts of the Reagan administration weren't all that substantial. So we've seen in the past and it's not now generally not good news for the stock market, and the economy. But that's, that's a bit into our future. And I don't think it's something that investors or business people should be caught up in, maybe thinking about it as something on the horizon, but don't get caught up in it. Thinking about it right now. At least in my judgment. It's a little bit too soon. For that, but don't take your eyes off it.
And now a number that a lot of people do look at when it does come out, what is your outlook for the unemployment rate over the next couple of years?
That's a really good question. Also, I think things are on the mend. And I mean, they're on the man, I think that we had a big surge or recovery in the month of May and June. From the abysmal numbers we saw in March and April, things are going to slow down because obviously, there's really deepening concerns about the resurgence of Coronavirus throughout the United States, particularly California, Texas, Florida, southern states western states. And that's going to slow the recovery, the slow the reopening. One question that I often get is going to derail the opening. Are we going to go back to March or April? And I think the answer from the markets is no we're not going to go back that far. But there's no question things are going to slow down from here. So we'll see a big surge in the economy in the month of in the third quarter. We'll see it slowly a little bit in the fourth quarter. But I think we're looking at positive numbers as we move through the remainder of the remainder of this year 2020 and 2021. What does it mean for the unemployment rate, the unemployment rate get up to as high as 14.7% from 3.5. Well, that's a big number 14.7, it's going to get better down to I think, 10.3% as we end this year. 9.1, I think is my projection for 2021 and 7.5, or 2022. So we're going to be on the mend. But once again, things are going to slow down, they're going to get better, they're going to slow down, the unemployment rate will come down, and we'll start to recover some jobs as we move through the remainder of 2020 and 22,021. But when we look back at this year as a whole, it's still going to be that deep hole we dug in March in April, and we won't get out from that hole but we'll be headed in the right direction. So I'm, I think it's a positive it's a positive forecast within the context of something that really was pretty miserable for the month of March. And in April is we locked down the U.S. economy.
And I almost always ask you this. So with all of this information that we've spoken about, what is your advice for investors?
Yeah, that's a good question. Look it there's no question I have a positive outlook for the economy and earnings. And I think stock prices, although I think stock prices may be a little bit ahead of themselves as a guest become very far very fast up to 45%. Since March, just common sense alone says, you know, maybe there'll be a little bit of a pullback here somewhere, but I don't think it'll be all that significant. I think interest rates are going to stay pretty much at the current level, the Federal Reserve is not going to change interest rates, which really means that we'll be able to support the stock prices around current valuations, generally speaking, there'll be some give ups as I say along the way. So that's, that's the good news, and we'll all depend on earnings and I think earnings will get better. In 2021, and the markets will reflect that and go higher. But there's no question. There's no question to him this this is an equity market a stock market environment that's full of a lot of risks. So what I would tell investors is don't bet the ranch on a forecast by me or anybody else. I'd say keep a modest exposure to equities, I think equities will be okay. But I again wouldn't bet the ranch don't get a big exposure to equities and, and maybe own some defensive stocks in your portfolio things that pay good dividends, dividends really count. When things are not crystal clear and great. So it's a bull market. I think a positive market I think you can expose yourself or buy equities or own equities. But don't bet the ranch and make sure you get a little defense in your portfolio and wait for the clouds to clear and I think that'll happen probably when we get to 2022 but you know, just recognize a bull market with a lot of risk.
Was there a jump in people pulling their money – specifically those near retirement age – as Wall Street began to tank because of pandemic shutdowns?
You know, it's a really surprising thing that's the one thing that we have not seen. And it sort of leads me to be a little bit more optimistic as we have not seen a lot of pessimism show up in the markets, quite frankly, not a lot of pessimism, almost no pessimism. And so investors are really not lost their faith in the markets. I don't know why that is, but that is the case. And so that's, I think you have to look at that as being on the promising side of things. Which as soon as investors become too optimistic, that's the time to jump ship. And when they become too pessimistic, that's probably time to buy and we're probably closer to the lower end of things and, and, and so I don't think there's anything in the so called sentiment numbers among investors. It says to me that we should, we should exercise even more caution. No, I think this is one of the surprising things investors have not lost their faith. They become shaky. There's no question about it. I've had a lot of calls from a lot of clients that want to reduce their allocation equities and we've done so. But for the most part, I think everybody stayed fairly common and held tight.
