We may need 'another stimulus package' soon: CIO

Hugh Johnson, Hugh Johnson Advisors CIO joins Yahoo Finance Live to discuss how markets are faring amid the pandemic and outlook for more stimulus in 2021.

Video Transcript

- Let's bring in Hugh Johnson. He's Hugh Johnson Advisors CIO. It's always good to see you, Hugh. So as we watch this rally today-- and we're going to talk more with our Jessica Smith out of Washington about the CARES Act in just a moment.

But I know that you have been thinking about the effect of aid on the US economy. Not just the CARES Act, of course, but the aid that just passed and the aid that may yet pass. Is that a big part of the economic thesis you think for folks is that aid flowing through into the economy?

HUGH JOHNSON: You bet it's a big part. And what we've seen, Julie, more recently, is not just myself, but most economists have been revising higher their forecasts, not just for the first quarter where we're going to see the impact of the $908 billion that was passed at the end of December, but also for most of 2021, where we'll also see the $1.9 trillion that was just signed into law by the president on March 11th. And when that stuff hits the US economy, you're going to see it.

Now, not in the January numbers that we saw this morning, but you'll see it generally show up in the personal income, personal spending numbers, and importantly, in the employment numbers, which, of course, we're all focused on. So you bet, the revision's upwards by economists.

The consensus has gone up from 4.9% which was the forecast for 2021 in January. And now it's up to 5.7%. Julie, that's a very big number. And that number is, in large part, due to the additional stimulus.

Of course, it's also due to the fact that the vaccine program will be successful. And we'll have fewer lockdowns, and we'll have more reopenings. So those two things are the big factors. And these are very substantial upward revisions.

- Hugh, bigger picture here, do you think the market has become hooked on the fact that consumers are going to need stimulus checks just to really continue to make it through the pandemic? And do you think another round of stimulus checks are possible?

HUGH JOHNSON: I wish I knew the answer to that question. Brian, we still have a lot of people that are unemployed. We're down about nine million people still from the levels that existed prior to the pandemic. A lot of people are still hurting out there.

You're going to hope that the vaccines are successful, the stimulus is successful, and we start to get much better employment numbers over the course of the next four or five months. I think we'll get better numbers. Whether they'll be sufficient, I don't really know. We may very well need another package.

I might just make one comment from financial market history, financial and economic history. And that is I know there's a lot of concern that we're spending a lot of money, and the deficits and the debt are going very, very high. And they're very troubling to a lot of folks.

But financial and economic history says very clearly, and I'm going back to 1620, it's very clear. You really have to spend a lot of money when you're in a crisis. And we're doing just that. And I think that's one of the principle things that's motivating Federal Reserve policy, for the Federal Reserve to say about inflation that I think it's going to be transitory, but they're likely to say it's going to be transitory.

But the number one thing driving policy, both by the government as well as the Federal Reserve, in my judgment, is a view of financial market history which says spend a lot of money. You can mop it up after the crisis has passed. But continue to spend a lot of money, even though it doesn't feel right, particularly for Republicans and those that are debt hawks.

- Oh, it feels right when your party's in power, doesn't it? And doesn't when they're not. But there are some investors who are starting to raise concerns about increased taxes, both on high net worth individuals and on corporations.

Now, if they look at financial market history, they would see that markets tend to perform well, even when taxes go up. But nonetheless, that is a concern that's being expressed. How are you thinking about taxes? Is it too early to be worried? Should we be worried at all? What do you think?

HUGH JOHNSON: I can tell you from taking a look at it. When our clients come to us, they're talking about taxes almost continuously. And they're talking about personal income taxes.

They're talking about increasing the corporate tax rate from 21% to 28%. Incidentally, Julie, it's not going back up to 28%. It might go to 25%, but it won't go to 28%.

The other thing, of course, is what our clients are talking to us about is, look, are we going to have a change in the estate tax laws? There's a lot of taxes in the Biden agenda or program. But keep in mind one thing, is first of all, they haven't been passed. It's going to be very tough to pass.

You hear what he has to say about the filibuster. He knows he's going to have a tough time getting any of these taxes passed when we have a 50% of the Senate in the hands of the control of the Republicans. So it's going to be very, very tough to pass them.

And then, keep in mind the other thing, which is not only do you have tax increases, but you have a substantial spending on infrastructure, education, environmental concerns. And I think you'll see that the taxes are pretty much offset by the increases in spending. So it's really fiscally neutral.

But leaving that aside, I know you worry about taxes. I hear it from our clients every day. They're very concerned about these taxes. But getting these taxes through Congress is going to be one feat. And that's why you hear Biden talking about filibuster.

- Your clients are concerned about taxes, but I would ask two things. First of all, if they were in the market for the last year, I would imagine their wealth has gone up substantially. And two, are they yet changing their behavior, or will they, as a result of fears of higher taxes?

HUGH JOHNSON: Yeah, that's a really good question, Julie. I wish I knew the answer. You talk about capital gains taxes. Again, that's another question I get just about every day from our clients. What am I going to do about capital gains?

The capital gains that they have, as you just mentioned or implied, are just so substantial. They don't want to sell. They don't want to take those gains. They don't want to pay that capital gains tax.

But they're very worried that capital gains taxes are going to go higher, and they're stuck. They don't know quite what to do. Is there a strategy out there for somebody that's very wealthy and has made a lot of money in the markets? Is there a strategy where they can protect themselves, to build some defense just in case we have a decline in the market, for example, which they're very concerned about, a decline that might be touched off by an increase in capital gains taxes?

They don't know what to do. There are strategies you can use. But let me just say one thing about those strategies, and they imply the use of options, and I think you probably know some of them, but nevertheless, look, these defenses, they're not free. They cost money. And they're good defenses, but they cost money. So I just don't know the answer.

Clients are very, very concerned about increasing the capital gains tax. They're stuck. They don't know what to do. It's tough. It's a very tough situation.

- So, Hugh, just staying on that, let's say the tax increases are announced. Do you anticipate selling stocks ahead of any increase in taxes?

HUGH JOHNSON: Boy, Brian, that's a tough one. People had these big gains, as you know. And they're very reluctant to sell because they're going to incur the capital gains.

You're going to get some. You're going to get some selling. We're seeing some people that are cutting back on their positions.

Look, evaluations are not cheap, and particularly evaluations in the five or six stocks that have really led the market in 2020. Less so now, but led the market in 2020. They're going to cut back a little bit.

That's putting some downward pressure on. You see that already show up in the performance of the NASDAQ compared to the performance of the Dow Jones. So there is some selling. There is some selling going on, but it's not widespread. And it's not widespread because I go back to what I was saying before, is people are a little bit stuck on what to do. They really don't know what to do.

So they decided, let's cut back a little bit. There's evaluation concern. There's a concern about the enormous capital gains that they don't want to give back. So they'll cut back a little bit. And that's creating a little bit of downward pressure on things like the NASDAQ.

And that's what you see going on in the markets. But it's not widespread. Believe me, it is not.

Everybody basically down underneath is saying this is a new bull market. And this bull market has farther to go. And we want to stay on board. By in large, that's what they're saying.

- Hugh, it's always great to catch up with you, hear what your clients are saying, what you are saying. Appreciate your time this morning.