Abby Joseph Cohen On Tech. And Interest Rates.
Chair, Investment Policy Committee, Goldman Sachs,
New York City
Barron's: The markets are "all shook up," to quote Elvis, since the Nasdaq hit the skids in early April. Has there been a sea change among investors, Abby, or is it just a momentary mood swing?
Cohen: There's been a real change in "attitude," as New Yorkers refer to it. What we saw in January-and it reached a climax in the middle of Marchwas exuberance and enthusiasm carried to very interesting levels. In the third week of March we adjusted our recommended portfolio, lowering our equity allocation to 65% from a prior 70%. We consider 65% a "normal" weighting. Secondly, we concluded technology was getting more than enough respect, and that the tech and telecom portion of the portfolio should be underweight relative to the S&P 500. Technology by itself had quadrupled as a percentage of the S&P 500, and it wasn't going to quadruple again.
Q: What's next for tech and telecom stocks?
A: Fundamentally, the technology sector is in very good shape. U.S. companies are still at the leading edge, and we expect to see enormous penetration into non-U.S. markets. There's a great deal of good news coming from these companies in terms of both products and earnings. From a stock standpoint, however, it's a very mixed bag. There is going to be significant consolidation within the industry. We're not negative on technology, not at all. It's still 35% of our model portfolio. But in the case of many poorer-quality companies, investors had put too much emphasis on share-price momentum, rather than earnings momentum and cash-flow generation.
Q: To what degree are investors' rate fears justified?
A: We think the Federal Reserve will raise rates one more time if the situation warrants. Most economists agree that we're going to know a lot more about the state of the economy toward the end of the summer. If I were a member of the Fed I would certainly want to wait until I had more data and could pull together the pieces of the jigsaw puzzle. And if our 2000 earnings forecast is correct-namely, that there is a notable deceleration in earnings growth under way-the Fed might decide it doesn't have very much more to do this summer |
