I don't think there's any hard and fast rule about that...a lot depends on what you have time to do, and the appreciation. If you really like it when a new person watches you, maybe you want to reply with a shout back to their journal thanking them. If someone who isn't watching you favorites something, you might want to acknowledge that too.

I think it really just comes down to what you'd like to do personally, and how practical it is to reply to favorites/watches.

Yeah, it's just a personal preference thing as to if you respond to them thanking you for the watch, fav, etc. If they commented or something on your page, then maybe a response back on theirs is in order, but if you just are going to send "Thanks for the watch" to anyone who watches you, it just seems rather pointless, even if it is polite.