One on One with Hugh Johnson, Chairman of Johnson Illington Advisors
Monday, October 30, 2006
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SUSIE GHARIB: This is a big week for investors. Lots of important economic numbers come out that will give the first look at how the economy is doing in the fourth quarter. Joining us now with look at what all that means for the markets, Hugh Johnson, chairman of Johnson Illington Advisors in Albany, New York. Hi, Hugh.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: All right, so some of the numbers that are coming out this week, home sales, auto sales, the employment report, what are they going to tell us about the fourth quarter and the economy? And what impact might that have on the markets?
JOHNSON: Well, I think they're going to tell us pretty much what we saw and when we saw the third-quarter numbers, 1.6 percent growth in GDP for the third quarter. Essentially the economy is slowing, slowing to what the Fed would call a sustainable pace.
I think these numbers are going to say the same thing. I think auto sales, when we look at the manufacturing sector in the very important employment report, it's going to say yes, the economy continues to expand. It's positive growth. But it's not very exciting growth. So something between zero and say two percent, call it a soft landing or a little bit rougher than a soft landing, but still positive growth in the economy.
GHARIB: So is the fourth quarter going to be the worst of it? And then we move on to a stronger economy in 2007? Or will it continue into the new year?
JOHNSON: Susie, I think you've got that exactly right. I think it's the third and the fourth quarters that the markets in the spring and early summer signal we're going to be soft. But since the middle of July, the financial markets have been sending a fairly positive or optimistic signal saying that after we get through the third and fourth quarter, in a sort of saucer-like fashion, the economy is going to start to improve.
You know, growth in 2007 will still be on the soft side, something in the order of say, 2.6 percent. But it will be expanding at an increasingly better rate as we get through 2000 or move through 2007. So the answer is third and fourth quarters will be the weak spot. Then we get better.
GHARIB: So it sounds like from what you are saying it might justify a rate cut -- interest rate cut by the Federal Reserve. You know, there is this whole debate going on, what is the next move going to be? Is it going to be a rate hike, a rate cut? Where are you in all of that?
JOHNSON: Well I don't think a rate hike is in the cards. I think the Fed's got this one about right. And they're saying the economy is going to slow to a sustainable pace.
If the economy slows to a sustainable pace, the rate of inflation is going to come down. That means they are either going to leave rates unchanged or maybe at some far distant future date, cut rates. But if you are looking at say the December meeting, the January meeting, the March meeting, I think the best bet is they're going to leave interest rates unchanged. And then maybe as we get to the third quarter of 2007, they will cut rates. But inflation will be lower and that will be key variable.
GHARIB: We've seen as the stock market has done really well in the month of October, particularly the Dow with all of those records. What is your outlook for the market for the rest of this year?
JOHNSON: Well, you know, I think the markets might inch a little bit higher despite the fact that I think that the market's a little overvalued, only two and a half percent.
But you know, Susie, there's so much money, so much liquidity. Whether we're looking at private equity funds or we're looking at mutual funds, we're looking at hedge funds. Hedge funds have very big cash positions and there will be a lot of pressure on them to get their money into the market as we start to move in through December. So I think we move a little bit higher as we move towards year ends. And I think 2007 shapes up as a reasonably positive year.
GHARIB: Real quickly, what is your view on Wal-Mart stock given the news today?
JOHNSON: You know, I stay away from Wal-Mart. It's such a big company. It's a slow-growth company. I don't think it represents particularly good value. Quite frankly, if you are looking at something that's sort of a retail type stock, look at other things. Look at Target, for example, which I own and we own in all our accounts, Staples, another good one.
GHARIB: Do you own Wal-Mart?
JOHNSON: No, I don't own Wal-Mart and I don't think we're going to buy Wal-Mart.
GHARIB: Thank you, Hugh, appreciate you coming on the program. We've been speaking with Hugh Johnson, chairman of Johnson Illington Advisors in Albany, New York.
