Hugh Johnson Economics Chairman and Chief Economist Hugh Johnson joins Yahoo Finance Live to discuss how the markets responded to the latest inflation data and the outlook for Fed policy.
Video Transcript
JULIE HYMAN: I want to bring in somebody else who has a view on all of this, and that is Hugh Johnson, chairman, and chief economist at Hugh Johnson Economics. Hugh, it is great to see you. Where do you stand on all of this in terms of what you think the CPI did to the expectations about what the Fed is going to do?
HUGH JOHNSON: Yeah, Julie, you're right, there's not going to be an inter-meeting rate hike. And we've seen a lot of comments from various members of the open market committee, you know, you've heard some of the dark things being said both by companies as well as some reference to say, Bullard. No, most of most people are saying there won't be an inter-meeting rate hike. We'll probably have to wait till March, we will wait till March. And in March, we won't get 50 basis points, we'll only get 25 basis points.
There's a lot of hysteria that broke out when we saw that Consumer Price Index. And that created a very sharp decline, of course, in the stock market based on the expectation that the Fed was going to be more aggressive than four, maybe five hikes this year. Quite frankly, you see the market starting to recover today and I think that reflects the fact that now that more sober minds have sort of taken over, we're really still looking at four to five increases in interest rates in 2022.
And it's going to be, and this is important, it's going to be data-dependent. You're going to see other numbers including another Consumer Price Index and employment number before the March meeting. And as time goes on we'll see more information, and the rate increases or changes in rates are going to depend on what the data looks like. But right now, your best bet is four, maybe five in 2022. Don't get hysterical. Don't talk about inter-meeting. Don't talk about 50 basis points in March. We're still about where we were before we saw that very, very high print on the Consumer Price Index.
BRIAN SOZZI: Hugh, you know, you're my guy. We've talked many times through the years but let me push back on the hysteria, should there be a little bit of hysteria in the broader market. We were talking about yesterday the price of my deodorant has nearly doubled, it has nearly doubled. And that's just one product out of many aisles that have gone up significantly in terms of inflation. Doesn't the Fed have to step up here soon and be aggressive and stomp this stuff out?
HUGH JOHNSON: You know, you guys had meetings or you had some interviews with a lot of companies. Those companies were service companies. Let me invite you to take a look at some of the manufacturing companies and what's going on there as well, and that's also important. How about automobiles? Automobile sales are extraordinary now, they're very, very strong. And that's largely a reflection incidentally, I think, in response to the fact that we're seeing the shortages of semiconductors start to be relieved or abate. And you're seeing signs right now across the board.
You know, these are not strong signs, these are not things I would bet a lot on but you're seeing improving labor market conditions. You saw the increase in the labor force. That's a little-- it points to a little bit of an increase in those upward pressure-- tightness in the labor market and upward pressure on wages. You've seen some better improvement on the blockchain-- on the chain-- the supply chain problems.
Purchasing managers, the percentage of purchasing managers that are seeing slower deliveries or bottlenecks, that's come down quite a bit since November. The percentage that are paying higher prices, that's come down a lot since. So the point is, what I'm trying to say is, this is not all dark. And in time, I'm crossing my fingers when I say this, I think you're going to see for very sound reasons, you're going to see the rate of inflation start to come back down towards maybe not the levels-- certainly not 2%, but back down towards 3.5% to 4%. And I think you're going to see that in 2022.
This is not all dark, and you've got to look beyond the services and you got to look at manufacturing. Things might get better than you think. Particularly, when everybody's kind of at an extreme right now.
JULIE HYMAN: So it sounds like you think that you know, you're still on team transitory, right? In other words, you think that even if the Fed didn't tighten, we would start to see pricing moderate?
HUGH JOHNSON: Yes, that's absolutely right, Julie. And as I say, you see those leading indicators of inflation coming down but there's a lot of other reasons sort of technical reasons which I think that it's going to come down. I'm saying that as a forecast but I'm also saying that as a hope and a prayer. Look, it's not for sure, it's not certain, it's not guaranteed. But you look at the numbers, Julie, and I think you can make the case, look, we're not going to have a grand slide in the rate of inflation but it's going to come down to much more moderate and manageable numbers in my judgment, second, third, and fourth quarter of this year.
BRIAN SOZZI: Hugh, seven rate hikes this year as Goldman suggested this morning. If that does actually happen, does that mean S&P 500 fair value under 4,000? And if so how do you play this?
HUGH JOHNSON: Brian, I haven't worked the numbers through. I wanted to do that this morning before I got on with you, to work those numbers through. If you have something like seven increases in the Federal Funds rate in 2022, you clearly, you're right, I mean, that means higher interest rates in 2022 but we're not going to be going to what I think we were going to go to, which is upwards of say 235, we'll go maybe a little bit higher. Price/earnings ratios coming down, upside potential for the stock market coming down.
I don't know if we're talking 4,000 but we are certainly talking lower than we are right now. The markets will price in but they're not going to price in five, six, seven, right now. Well, maybe five, but not six or seven. That's not going to be in the cards. People are not going to price that in. Investors are not going to buy into that. So I think we're really still talking about the markets and I think they've done a good job of it of pricing in four or five increases in 2022. And that's it for now. And now let's watch the data and listen to what officials of the federal open market committee say about what they're going to do about the data or about interest rates. I think we're talking four or five. I would not be talking six or seven. I think Jan Hatzius at Goldman is wrong.
JULIE HYMAN: So as we take a deep breath on all of that, what do you do? What are you recommending right now? What's the strategic move right now when it comes to equities?
HUGH JOHNSON: Yeah, Julie, it's a great question. The problem is, is we're in a low-return environment. And the problem is, is that even though it's a low-return environment, it's going to be a low-return but it's going to be OK for the equity markets. But you know, the problem is a low-return environment, it's still going to be the case that equities are going to outperform fixed income from a return basis-- on a return basis. So you've got to stay overweight in equities. I wouldn't change that weighting.
The only thing I would do in portfolios is if you're a little bit scared or nervous about this current inflation hysteria or outbreak, maybe shift a little bit of the portfolio towards defense. So it's not a bad idea to be looking at consumer staples, not a bad idea to be looking at health care. Maybe utilities, I hate utilities in a bull market, they don't work, but maybe if you're really worried about it that would be fine.
But don't forget bull market sectors and technology still has positive relative performance. So don't go too far from technology, that'll help you a lot if this market turns out the way I think it will turn out. And that'll be, it'll still be a positive market, equities will continue to outperform, and the bull market sectors or economically sensitive sectors will be the best performing sectors inside the equity markets.
JULIE HYMAN: Hugh, always good to see you. Thanks so much for all of this. Hugh Johnson, chairman, and chief economist at Hugh Johnson Economics. Thank you.