Thread ---A good read for a morning like this :
Abby's take on the markets
smartmoney.com
September 21, 2000
Abby Cohen Isn't Spooked
By Lawrence Carrel
UBER-BULL ABBY JOSEPH COHEN came down from the mountain Thursday to tell her worried clients that all is well with the U.S. economy. The stock market, she declared, will rise again before the year is over.
Goldman Sachs's famously upbeat investment strategist (and our No. 1-ranked pundit) said investors have become alarmed by the recent confluence of rising oil prices, a weakening euro and short-term profit concerns. But she assured investors that these factors are being accentuated by mutual-fund managers' end-of-the-year portfolio cleanups and will be short-lived.
“September and October is always a sloppy period in the U.S. markets.”
Abby Joseph Cohen
Goldman Sachs pundit
High oil prices are a short-term problem, Cohen said, as is the weak euro. She believes the European currency is undervalued at this point and will rebound, increasing demand. "Bottom line, we think the most important element there is whether there has been a change in the fundamental outlook for the economy," said Cohen, adding confidently, "We think not."
For 2000, Cohen expects to see earnings growth of at least 8% to 10% in the S&P 500 index. Consequently, she's keeping her year-end target for the S&P 500 at 1575 and predicts it will hit 1650 by the middle of 2001. Her asset allocations remain at the level she set late in March — 65% stocks, 27% fixed income, 3% commodities and 5% cash. (It's worth remembering that when Cohen lowered her equity allocation in March, the news helped spark the market's major correction.)
Cohen noted that since late last year she's predicted that growth in profits and the economy would slow during the second half for three reasons — economic deceleration, tougher year-over-year comparisons and sharp increases in consensus earnings estimates at the start of the year. Still, she asserted that this economic deceleration "will bring us to a pace consistent with an even longer-lasting expansion."
As for the euro, Cohen pointed out that this year's decline isn't all that large compared with 1999, when the currency suffered its greatest setback relative to the dollar. Goldman's currency team believes the euro is undervalued, Cohen noted, and if it recovers on improved economic conditions, demand should pick up, alleviating the problem for many companies.
Goldman's research teams believe oil prices will remain high — but not as high as they are now. She expects the current situation to persist for only a few more months, or perhaps through the winter. Current high price levels are the consequence of growth in aggregate demand exceeding growth of supply, she pointed out, rather than the sort of supply disruptions that precipitated the oil crisis of the 1970s. Cohen expects high prices to lead to increased production, which in turn will lead to lower prices. In addition, she said, slowing economic growth will decrease demand.
Cohen did say that the next six weeks will be volatile ones in the U.S. stock markets, as mutual funds approach Oct. 31, the end of their fiscal year. Funds will be adjusting portfolios to minimize taxes for shareholders, and many will sell beaten-down stocks so they can use the losses to offset capital gains. This will exert more selling pressure on already depressed sectors. At the same time, funds with big losses will sell stocks that have done well, in an effort to boost their annual returns.
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"September and October is always a sloppy period in the U.S. markets," Cohen observed. She added that the legendary January effect — a surge in stock prices as more cash comes into the market at the beginning of the year — starts earlier each year and now begins around Thanksgiving. Investors, she concluded, should be prepared for an upturn around then.
What sectors does Cohen like? Elaborating on her morning research report during a conference call with clients, Cohen advised them to overweight their portfolios in three groups: financials, energy and drugs and pharmaceuticals.
A lot of financial-services stocks performed poorly at the beginning of the year, she noted, because of concerns about rising inflation and the Federal Reserve's aggressive interest rate policy. Many are attractively valued despite the recent run-up, she says, and good opportunities persist as the sector's consolidation continues.
Cohen recommended the energy sector — since late 1998 her largest overweighting compared with the S&P 500 — as "an area of opportunity over the short and medium term."
Finally, she likes drugs and pharmaceuticals because "this will be an area propelled on unit volume growth, and the changes in health care will become linked to pharmaceuticals."
Asked about technology and telecommunications companies, Cohen said, "We like the fundamentals and the long-term opportunities, but we would be wary on the valuations of specific stocks." Technology is currently overweighted in her portfolio, at 38%, she said, but she wants a weighting of 35%.
Looking at the broader picture, Cohen said the U.S. economy's fundamentals remain strong in the wake of numerous structural improvements over the past few years. She pointed to monetary policy, which has led to the current fiscal surplus, and the movement toward open trade. In the private sector, she applauded what she called better decision making among businesses — primarily the adoption of a longer view for corporate investments, tighter inventory controls and increased emphasis on measures such as return on equity and return on assets. The notable increase in labor productivity, she added, has created an environment in which the gross domestic product can expand without inciting inflation. Moreover, she said, "There is little on the near-term horizon to suggest that these longer-term structural gains will soon lose their potency."
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