In tonight's "MONEYLINE Focus," the stock market. 2 August 1999
The major indicators have fallen sharply from their all-time highs set
just two weeks ago. The Dow is down five percent from its record, the Nasdaq more than eight percent. But my guest tonight is not rattled by the volatility the Wall Street. He is Hugh Johnson, chief investment officer of First Albany.
Hugh, welcome back to MONEYLINE.
HUGH JOHNSON, CIO, FIRST ALBANY: Nice to be here, Stuart.
VARNEY: You know, with many, many economic reports, like today's NAPM report, if you look behind the top headline numbers there's often a whisper about inflation, a hint of what's happening on that front. Anything in today's report that would concern you?
JOHNSON: Absolutely, Stuart. There's a couple of components of this report that are so-called "early warning signs" of inflation. One, of course is prices paid -- percentage of purchasing managers that are paying their vendors higher prices -- the other is supplier deliveries -- the percentage of purchasing managers seeing slower deliveries, sometimes a sign of bottlenecks. Those two early warning signs of inflation have been rising for three or four months now and not only trouble bond market participants, particularly ones that watch carefully, but also Alan Greenspan, who watches those early warning signs very closely.
VARNEY: It's not just inside baseball, these are important little indicators, are they?
JOHNSON: There's a number of early warning signs of inflation, which everybody watches. So not only do we have upward pressure on wages, but we also have a sign that it'll eventually translate into some upward pressure on prices: not alarmingly so, but certainly troubling.
VARNEY: You've raised your forecast for inflation, the CPI, for 1999, haven't you?
JOHNSON: Yes, I sure did. As a matter of fact, I did that today, and I did that today in part based on those early warning signs that we're seeing. Not significantly so, though -- I was at about 2.3 percent. I'm now up to 2.7, bordering on going to 2.9. And looking at the year 2000 as 2.9 also.
So those are higher inflation. Certainly higher than the 1.6 of 1998. But not alarmingly, but troublingly higher.
VARNEY: Would you have to say that the stock market is stalled for some time to come, with 11,000 and small change as the absolute top?
JOHNSON: What's happened, Stuart, is we've moved from a declining inflation and interest rate environment, which we've had for the last four years. Now, it's clear that we're going to have rising inflation and obviously rising interest rate environment.
Under those conditions, you don't have the kind of easy times, the 20 percent returns, that we've had for the last four years. Now, I think you have to accept that if we have 8 to 10 percent returns, something more normal, I think that's what investors can count on.
VARNEY: But the other side of the coin is that earnings are very, very strong, and surely a baseline for stock market performance is the profitability of American corporations. It's never been higher.
JOHNSON: No question about it. The earnings side of this picture has been extraordinarily good. The problem is now is not the earnings side; it's the price/earnings ratio side. With interest rates higher, you know, basically people will not pay that same 25 to 30 times earnings for the current level of earnings because they've got a good alternative now, and that's the bond market.
They can always shift money at relatively less risk into the bond market.
VARNEY: I've followed you for a long time, and you like the technology stocks. But I understand you've recently turned to liking oil stocks. Is that true?
JOHNSON: Recently. And one of the things I do, Stuart, is I obviously don't try to forecast the markets. I let the markets tell me what to do. And the oil stocks, on a relative performance basis, have been acting very well: obviously in response to the rise in oil and the prospect that earnings for oil companies are going to be great down the line.
So energy stocks is one sector of the market I would...
VARNEY: You would buy some now, would you?
JOHNSON: Yes, I would buy some now, but I think everybody has to accept the fact that we're going through an adjustment in stock prices down to price/earnings ratios that make more sense in a rising inflation market.
So a little bit of an adjustment, so when you buy now, buy a little. Don't go in with, you know, everything flying.
VARNEY: You used to be an expert on Wall Street. Buy all dips, sell no rallies.
JOHNSON: Right.
VARNEY: That no longer applies, does it?
JOHNSON: Well, you know, one of the things that's been very troubling to me in this entire market the last two or three weeks when we've had a decline is the market is, you know -- we've had good earnings numbers.
The market is not responding to good news. And when you see the market not responding to good news, it means that the direction is down.
VARNEY: Hugh Johnson, can you give me 20 seconds on ".com" stocks?
JOHNSON: Still a little bit pricey, still a little bit overvalued, still a little bit speculative. I think in this environment they're going to come down some more.
On a long-term basis, Stuart, you have to own the really good ones, but only on a long-term basis. VARNEY: Can you give me five seconds, Hugh Johnson, on gold stocks?
JOHNSON: Gold should be doing much better in an environment where...
VARNEY: Yes, right.
JOHNSON: ... there are prospects for inflation, and it should be. Wait until you see the actual whites of their eyes, so to speak. Wait until you see gold stocks start to rally, the relative performance start to pick up. Then you buy them.
I, quite frankly, am mystified by the fact that gold stocks are not performing better.
VARNEY: Hugh Johnson, First Albany. Many thanks. It was a pleasure.
JOHNSON: My pleasure. |
