One on One with Hugh Johnson, Chairman of Johnson Illington Advisors
Thursday, October 09, 2008
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SUSIE GHARIB: Joining us now with more analysis, Hugh Johnson, chairman of Johnson Illington Advisors. Hi, Hugh.
HUGH JOHNSON, CHAIRMAN, JOHNSON ILLINGTON ADVISORS: Hi, Susie.
GHARIB: Hugh, I mean, the pace of this selling has been amazing, from 11,000 level to 10,000 now to below 9,000 on the Dow. Is this the capitulation that so many market strategists have been calling for?
JOHNSON: It certainly feels that way and looks that way. You know, Susie, historically when you get pessimism that is this widespread, when you get stocks trading down to levels that are arguably undervalued, when you get this level of volatility in a veritable race for the exits by individual investors and institutional investors, so very sharp sell-offs, that's fairly symptomatic or characteristic of a bottom. It's like we saw in 1982, 1974. It's more symptomatic of the bottom of a stock market than certainly the start or the middle of a bear market.
GHARIB: Is this a bigger bear market than you expected?
JOHNSON: Oh, it's -- this is the humdinger of all humdingers. I've been through a lot of bear markets in my life but this one is probably as scary as any that I have ever been through. And primarily because it's being driven by problems, problems which we've never confronted, at least in my lifetime. The problems obviously in the credit markets and the concerns about the viability, if you may, of many large commercial banks, the level of risk, possible additional losses that they might have to take. This has really been some bear market.
GHARIB: But, Hugh, when you talk about problems, no matter what seems to be done by the government or by the Federal Reserve, there are no buyers, whether you are tucking about the global rate cut or the Fed jumping into the commercial paper market, so no matter what step it is, it seems like nobody has confidence in what is being done. What is your reaction to that?
JOHNSON: Well, are you absolutely right. What are you seeing is a total lack of confidence or collapse of confidence among individual investors. So what will restore or at least stabilize that confidence is something that investors can feel good about. One of the things they would feel good about is if you started to see the short-term credit markets, short-term lending markets start to stabilize and improve. In other words, companies, businesses, small and large, were able to get their funding needs met, were able to borrow money in the short-term markets to meet their payrolls, pay their bills, and finance their inventories. If you started to see some signs, leading indicators for the economy, jobless claims, for example, if they came down sharply for two or three weeks successively, then investors could have something to get their teeth into, to feel a little bit better about. And then you might see them step in and start buying. We haven't seen that yet. And that is why confidence has not been restored.
GHARIB: Hugh, what should investors do? Should they just give up on stocks and go to cash?
JOHNSON: No, you don't do that. You know, you keep -- stick with the long-term strategy that will work. I -- the one thing that's common about all of these bear markets and difficult times in the market is they all end. They are all followed by bull markets and recoveries in the economy. You can't tell how severe or how long this one is going to be. But the one thing you do know is that it is going to end. So I think you stick with the long-term strategy and recognize that on a long-term basis the return from stocks has generally outpaced the return from cash or bonds. So stick with it. And if you can't sleep at night, then take some money off the table or reduce your exposure to stocks, but don't give up.
GHARIB: I think a lot of people are having difficulty sleeping these days. Thanks a lot, Hugh, for coming on the program.
JOHNSON: You are welcome. You are certainly welcome.
GHARIB: My guest tonight, Hugh Johnson, chairman of Johnson Illington Advisors.
