Yahoo Finance’s Julie Hyman, Myles Udland, and Brian Sozzi break down today’s market action with Hugh Johnson, Hugh Johnson Advisors CIO & Chairman.

Video Transcript

MYLES UDLAND: Let's turn our attention back to what's happening in the markets. And certainly, you've seen investor enthusiasm around some of these appointments. Namely, Janet Yellen is the likely next Treasury Secretary. For more, on all of this, we're joined now by Hugh Johnson. He is the CIO at Hugh Johnson Advisors.

And, Hugh, I'd love to begin by talking about how you're thinking about what the economic roadmap could be next year under a Biden administration. Investors seemingly have talked themselves into being quite excited about what could be coming down the pike. How does this factor into your thinking, if at all right now?

HUGH JOHNSON: Well, I, I, I like what I see. I mean, first of all, I like what I see in Janet Yellen. I think she's going to provide all the kind of leadership we want at Treasury.

And you're likely to see some really good work or cooperation between Treasury and the Federal Reserve. And that's that's, I think, going to be a real positive. Some of this is going to depend, as was mentioned, just a couple of minutes ago, about the outcome of the election in Georgia.

And, obviously, if the Democrats are able to get hold of those two seats to get the majority in the US Senate, then they're going to be able to get the confirmation of not just the people that are going to be in these important positions, but they'll also get, to get done a lot of what Biden's pub plan is. And that includes some tax increases. And everybody worries about that. But at the same time, it includes a lot of spending increases, spending increases on the environment, spending increases on health care, spending increases and new infrastructure.

And quite frankly, if you put together the spending increases with the tax increases, it's really fiscally very neutral. So it's not going to have the drag that worries some-- worries some economists or observers. So I like what I see. I like what I see in Janet Yellen, but let's watch that Georgia election, because it's going to determine a lot of the outcome of the so-called Biden program as we move through 2021 and 2022. Politics will make a difference.

BRIAN SOZZI: Hugh, there's a lot of perfection priced into this market regarding the Biden transition, what he may do for the economy in 2021 with the COVID-19 vaccine. We've seen all stop-- all sorts of stocks just really rip higher over the past month. Do you think we're in the latter stages of a bubble here that ultimately ends badly in December with a awakening call in all sorts of economic data likely with the first jobs report?

HUGH JOHNSON: A great question. And the reason is, is because my numbers say-- everybody does the numbers differently-- and there were about 8.8% overvalued. The upside potential between now and the end of 2021 is about 4%, which is not very attractive or, or appetizing. So you could say that, yeah look, we've got-- we've moved from what might be called a very rational rise in stock prices to something that's a little bit less than rational.

We've got optimism starting to rise, but I would add, and importantly, I think, is that optimism is not widespread. We haven't moved into so-called a market where a lot of borrowing is going on to buy stocks at prices that are overvalued and, arguably, looking at some fantasy numbers. And quite frankly optimism is not widespread.

Even though we're slightly overvalued, optimism is not high enough. We don't see a widespread exuberance. We don't see euphoria yet.

So I say it's not a bubble, but it is overvalued. And we might have a little bit of trouble near term between now and, say, Christmas. Maybe the end of the first quarter with the stock market, it might have to give up some ground.

Looking further out, though, as I mentioned before, when you take a look at the vaccine and the possible impact on the economy, in 2021 and 2022, it's likely to have a, first of all, a return to normalcy in the second quarter. And you're likely to see a very significant impact on the US economy in 2021, 2022. It's going to raise everybody's forecast for 2021 and 2022. We're seeing that going on now.

And it's not just the forecast for the economy. It's the forecast for earnings. And earnings are going to be nothing short of spectacular in 2021. Look for 22% rise in S&P 500 earnings in 2021 on a year over year basis and a big number in the second quarter.

BRIAN SOZZI: Hugh, if we haven't reached euphoria and we don't have a lot of folks out there willy-nilly levering up their portfolios, which is good in the grand scheme of things, but if we haven't reached that point of euphoria, do you think December is another month where we might see another double digit gain in the markets? Look at the MSCI World Index, up 13% this month, Dow up double digits too.

HUGH JOHNSON: Well, if things stay rational, no, we're not going to see that in the markets. And, of course, if you do see that, you have to hearken back to Alan Greenspan and his irrational exuberance comments and say, well, maybe there's a place for those in the market right now. I hope we don't see that.

I hope that the markets become a little bit-- maybe even down a little bit, but don't go very far, and we start to get a return or recovery in sort of valuations to levels, which make me a lot more comfortable. I wouldn't mind seeing its decline in the stock market in December. I wouldn't mind seeing a decline in the first quarter in the stock market to levels that are more attractive. That makes me get a stronger appetite to buy stock, because the, the upside potential then will be all that much better.

So I'd love to see it. One thing you don't want to see is you don't want to see a move to too much irrationality and, again, you know, exuberance that might give way to euphoria. And then, and then we're going to be in for some, some real trouble.

JULIE HYMAN: Hugh, it's Julie here. It's good to see you. Among other things, we just got in a little bit of economic data pending home sales in October, a little bit lagging here, but still down for the second month in a row, down 1.1%.

And so I wonder whether you're looking at economic data or elsewhere. When you're looking at the potential for a pullback, what would cause it at this point? I mean, it always comes where you're not looking for it, but still what are the sort of risk factors that could cause it?

HUGH JOHNSON: The risk factors are, look, if people are sort of in the markets and out of the markets, they're trading the markets pretty actively, the real risk is they should start to get some disappointments. You get some disappointments on the economic numbers. Look, the economy is slowing.

You're going to see that in the employment numbers this Friday. You're going to see a gain in jobs, non-farm, payroll employment of about 500 to 600,000. And it's been coming down steadily since June.

You're going to see that in the retail sales numbers. You can see that consumption expenditure numbers. If those numbers start to come in a little bit less than expected, and we start to get some downward revisions to earnings estimates, I don't look for a lot of that, but I look for some of that.

In other words, without the stimulus, you're likely to get more sort of bad news, more evidence that the economy is in the process of slowing. You've seen some economists already reduce their forecasts for the first quarter to minus numbers. I don't think that's in the cards. But we're likely to have slower numbers, slower GDP growth, not as strong earnings, and that might be disappointing to create some of a pullback in stock prices, nothing really significant, though. A decline in stock prices is a reflection of numbers. It'll be a little bit on the disappointing side.

MYLES UDLAND: All right, Hugh, always great to get your thoughts. Hugh Johnson is the CIO at Hugh Johnson Advisors. Hugh, I'm sure we will talk to you soon.

HUGH JOHNSON: Thank you.