The coronavirus pandemic has shut down or altered many aspects of the global economy. To discuss what might lie ahead, WAMC's Jim Levulis spoke with Hugh Johnson, the Chairman and Chief Investment Officer of Hugh Johnson Advisors in Albany.
Levulis: What is your general outlook for the economy over the next year or so as the world deals with this global pandemic?
Johnson: Well, it's Jim, as you can imagine, this is so unique that it's very difficult to forecast what's going to happen to the global and the U.S. economy, particularly the U.S. economy over the course of the next year or two. Nevertheless, most of us know a lot of the variables and we take a real good shot at trying to try to estimate what’s gonna happen. I think what's interesting is that what's happening to the U.S. economy is very much condensed into a very brief period of time. And when I say brief period of time, it's an unusually brief period of time. It's clear that the U.S. economy contracted in the month of March, not so much in January in February, where the economy was still expanding. And it's also clear that a great deal of the contraction or recession in the U.S. economy is going to occur not only in March, but also in April. And after that, the U.S. economy is going to try to reopen. States are going to do that on a staggered basis. But we'll start to see some, I don't want to say positive, real positive news, but we'll certainly see a pickup in activity as we move through the remainder of the second quarter. And clearly through the third, fourth quarter of this year. I would look for positive growth numbers in the third and fourth quarter and as we move through 2021. I think each quarter will be will be positive. Keep in mind we're not going to get back to a level of economic activity or output in 19, in 2021, or I don't think so even in 2022, not to the levels that we saw before this all started. And we're certainly not going to get back to the levels of employment that we saw in 2019. And that also, I'll have to wait for a while, I'd say to be optimistic, late 2022. So it's going to be a long road back, it's going to be a slow road back. You're going to see the manufacturing sector of the economy first, the services sector, particularly things like tourism, restaurants, bars, you know, that's going to be a slow go. And it'll be, they'll come back but they'll come back very slowly and the same is true of employment. So, so, you know, be prepared. Prepare a place for some bad numbers for the month of April, and then some better numbers, but not great numbers as we move through 2020, 21, and 22.
Levulis: Hugh, you said that this pandemic is certainly unique. But you found that there are historical markers occurring that could give us some insight into what's ahead. What are those markers? And what do they indicate to you?
Johnson: Well, you know, the markers, the one marker that I think everybody should keep in mind is that when you look at Spanish, Hong Kong, Asian flu, or you look at all the epidemics that occurred since 1980, the one thing they all have in common is they all end and they do end and they have different timelines. And to some extent, we can affect that sort of timeline that each one does have through some of the measures that we take to try to contain this thing. You know, testing, you hear about contact, contact checking are really important. And needless to say that a vaccine could make this the whole timeline very, very different, shorter and not as severe. So that's one thing but I have crunched the numbers, so to speak, to see what might happen to things like consumer spending and inflation. And just as you might suspect, consumer spending is going to slow and slow significantly as we move through 2020, 2021. These are not going to be particularly good numbers. They’ll get better, a little bit better over time. But they'll be negative for the second quarter and a little bit positive as we go third, fourth quarter. And the same thing is true on inflation. I know everybody worries about inflation. They worry that inflation is going to go higher because there's so much money being added to the system. Inflation is not the issue right now. It's really deflation. You have to worry about low inflation, not high inflation. In time, maybe high inflation, but then now. And then there's stock prices, and I think stock prices everybody's concerned or worried about them. I don't think we're seeing the bear market lows. We may have seen the most severe in the bear market, but these things last longer. So I think we may have a little bit more time, but we'll probably get to lows, either in the third quarter of this year, first quarter of next year, sometime in that timeframe. And it won't be significantly, they will not be significantly below current levels. I would say 15% is the risk.
Levulis: With figures such as 30 million Americans applying for unemployment aid since the outbreak began, and the nation's GDP falling by nearly 5% in the first quarter of 2020, why are stock indexes on the rise as of late?
Johnson: Yeah, that's a great question. I've been asked that question continuously. How can you reconcile the performance of the stock market which has been a little bit better over the course of the last month with the numbers that we're getting on the economy? And the answer to that question is important, and that is the stock market investors tend to look ahead, and they're looking well beyond the second quarter, we know we've already reflected or discounted, I guess it's the technical expression. The second quarter people are investors are looking at the third and the fourth quarter. And what they see is, let's say, somewhat promising. So they're buying stocks now in anticipation of a recovery in the economy, and most importantly, earnings. Not a strong recovery, but some recovery from the dismal numbers that we're going to see for the second quarter. Stocks are looking ahead. And the important thing, Jim, I think, which is really a good observation, important observation is investors tend to get it right. And they're now telling us third, fourth quarter better than the second, a lot better.
Levulis: Gas prices are low across the country as the cost of oil has dropped. How does the global oil market play into all of this?
Johnson: You know, it's very important because oil is a big commodity and an important commodity to the global economy. And if we would think it would help and it certainly does help. The offset though, is that a lot of production, you know, a lot of people a lot of output for the U.S. economy is in is in the energy sectors on oil, natural gas. And a lot of producers are shutting, the prices of oil have come down to a level where they just can't make any money at it. So producers are shutting down production. So you're going to see a two things going on. One is a shutdown in production, which is not good news for the U.S. economy. That shows up in the numbers. At the same time, you're going to see prices, oil coming down, prices at the pump coming down. That's good news for consumers. But, you know, candidly, consumers just don't have a strong appetite to go out and do things like drive around anymore. And they, the consumers, our consumer confidence has plummeted, and therefore consumers are going to be pretty much doing what they're supposed to do, which is stay at home until they're told that they can go back to work or can go out and so, you know, yes, there'll be tradeoffs here. But I think the bottom line is that it's probably going to the tradeoffs will neutralize each other. They won't, it will not help the US economy. The other thing I'd say about oil is that we have unusual periods when oil prices go down very low. Gasoline prices go down very low. And same thing we have is prices when they go up abnormally high, you get big swings in the price of oil based on, you know, political conditions in the world, as well as conditions in the markets, the oil markets. And, I don't think we're going to stay down here very long. I think that the price of oil will eventually get back to what I call equilibrium price, and it's meaningfully higher, something around $40 per barrel.
Levulis: The COVID-19 pandemic has certainly impacted supply chains, especially those that go across international borders. Do you think this will push businesses and governments to insist on greater domestic production and reliance in the future?
Johnson: Oh, you bet. The one thing that that might come out of this, or one of many things that are likely to come out of this important is the, I don't want to say the end of globalization. But it's certainly every company that that has supply chains that reach to places like China is going to readdress those issues. And I quite frankly think that companies themselves not so much, but at the direction of the federal government, companies themselves are going to respond by bringing production back to the U.S. And I think that the whole concept of globalization which drove the economy and drove a lot of the variables for so long, that's going to come to an end. I don't want to say an end, but I think it's going to be certainly a lot less. So you're going to see, did you know, a lot less so-called globalization and supply lines that reach throughout the world. That I think is the thing of the past. That's one of the many things that I think are going to change and change importantly, because of this pandemic.
Levulis: And taking into account all of this information and likely more, what is your advice for consumers and investors in the new term?
Johnson: I think that the most important thing that I've said is that it's going to end and I think consumers should first of all, first of all, everybody should follow the rules. Secondly, I know consumer confidence has declined and consumers are reluctant to go out and start to buy. I think that's understandable. There's nothing wrong with that. Consumer balance sheets have been decimated. They've been decimated because a lot of people have lost their jobs, or they're certainly furloughed, and as a result of that, I think they're going to be cautious and coming out and that's just fine. Investors is a little bit of a different story. Yes, I still think this is a bear market. Yes. I still think the bear market will go lower. Yes, it has the possibility in my judgment, as I crunched the numbers, maybe 15% lower and you should still play on the defensive side. Don't jump back into the market yet. But I would say that the prospects for the market are not that bad, or reasonably promising. So I certainly wouldn't eliminate stocks from my portfolio. Yes, I plan on the defensive side. Yes, I'd emphasize dividends for now. But think about some of the companies that are going to do well, when this bear market and economic recession ends. There are a lot of companies that are going to prosper and do very well in the next bull market. And you should start, begin and the emphasis, the operative word is begin, to maybe add some of those stocks to portfolio. I don't want to give you any names now, but they might be in the technology, consumer services and consumer discretionary parts of the market. Those are parts of the market, which are kind of economically sensitive, or they do well, when the economy starts to recover and rebound.
