Goldman's Cohen Says Third Fed Increase Won't Stall U.S. 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.
- Holly Rosenkrantz in Washington, (202) 624-1822/wfs
Story illustration: To chart the Standard & Poor's 500 Index,
enter SPX GP.
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