** Abby says Third Rate Increase is in the Market **
My note: I do not believe Cohen said "probably" in relation to a rate rise in October. I believe she said a rate hike then was a possibility. We should try and find the transcript.
Goldman's Cohen Says Third Fed Increase Won't Stall US Stocks
Washington, August 29 (Bloomberg) -- Abby Joseph Cohen, one of Wall Street's most optimistic and accurate investment strategists, said the U.S. stock market will continue its strong gains into 2000 -- and one more increase in U.S. interest rates this year won't give much of a jolt to investors.
''What drives stock prices ultimately is how long the economy can grow, and we don't see it ending,'' Cohen said on ''Face the Nation,'' a CBS news show. ''Stock prices will continue to rise in concert with profits.''
Cohen, chief investment strategist at Goldman, Sachs & Co., predicted the Federal Reserve will raise interest rates a third time this year, probably in October.
That move is ''already discounted in the marketplace'' she said, calling the Fed's two interest-rate increases this year a ''partial reversal'' of three cuts made last year in response to the lack of liquidity in financial markets that followed Russia's debt default.
Investors didn't blink last week when the Fed raised the overnight bank lending rate a quarter of a point for the second time in two months. The Dow Jones Industrial Average set a record high of 11,299 on Monday, even as investors expected the Fed to boost rates the next day. It set another record high on Wednesday, closing at 11,326. And the Nasdaq Composite Index rose 4.2 percent last week.
Greenspan's Outlook
On Friday, Fed Chairman Alan Greenspan suggested in a speech that the U.S. central bank is paying attention to the potential inflation impacts of rising stock and home prices. Cohen said she interpreted those comments to mean Greenspan was simply noting the effect on the economy of the increased wealth that's been produced by the rising prices of both homes and equities.
''He's saying the equity market is having a mild impact'' on the economy, Cohen said. The effect of increased home values is broader because nearly ''60 percent'' of Americans don't own stocks, she said.
''Mr. Greenspan's comments were actually very interesting,'' Cohen said. ''What he indicated was that normally the economy will drive asset prices, that is, home prices and stock prices, and he is of the opinion that more recently home prices and stock prices are also having an effect on the economy. That is, as those prices go higher, consumers are spending more of the equity they have in there. And so, I think Mr. Greenspan is letting us know that he's watching.''
Cohen rejected a suggestion that Greenspan was suggesting he'd ''keep raising interest rates until this market cools off.''
''I believe that Mr. Greenspan has been consistent over an extended period of time telling us that he believes that the economy is sound and that investors should be thinking about whether stocks are reasonably valued and he made a point of not making a statement on that issue on Friday.''
Cohen's Outlook
Cohen gave no hint she'll hedge her bullish outlook for Wall Street. She currently recommends customers have 70 percent of their money in stocks.
Cohen projects 7 percent to 8 percent growth in operating earnings per share for companies in the Standard & Poor's 500 Index. Her current year-end target for the S&P 500 is 1325, and 10,300 for the Dow Jones Industrial Average. The S&P closed Friday at 1348, while the Dow closed at 11090.
Although she expects the economy and the stock market to continue its gains, Cohen said the U.S. Congress should ''be very careful'' on the question of tax cuts.
The Republican-controlled Congress recently approved a $792 billion tax cut package. President Bill Clinton says he'll veto it, setting the stage for negotiations toward something smaller.
The budget surplus that sparked the Republican push for a big tax cut ''might not be as large as we think,'' Cohen said, adding that paying down U.S. debt should be an important priority for the surplus.
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