Stephen & thread: The 'Funk' you speak of is a transient phenomenon as the outlook for 98 is not all that bad for the U.S economy.To see
what i mean, please read the following.
_____________________________________________________________________
98/00-Rational Exuberance
By Harris Collingwood
The star seer of this long market rally is abby Joseph Cohen, who is rarely pessimistic and even more rarely wrong. Here is her take on 1998.
It's not easy being an optimist on Wall Street. Argue that the stock market is about to slam into an iceberg, and you're guaranteed a respectful hearing-the very gloominess of the prediction establishes you as a serious person. But make the case that stocks still have room to rise, and you can expect the tolerant, condescending smiles that the well-balanced usually reserve for flat-earthers and Esperanto enthusiasts.
Abby Joseph Cohen wades right in against this tide of negativity. Not only has Goldman, Sachs & Co.'s chief U.S. equity strategist been resolutely upbeat about the U.S. stock market for the past several years, but she has been right-which ought to cheer those who want to believe her when she calls for more of the same in 1998. (Lest anyone accuse her of Pollyannatude: She also was among the first to call the 1990 recession.)
Cohen conveys her views in transparent, commonsense terms that make the pessimists sound like the flaky ones. This has made her a favorite source of financial reporters-she was quoted or mentioned in the U.S. press at a rate of better than once a day in 1997. But she's more than just a colorful quote. To judge by the many times her comments moved stock prices up or down last year, she has become this market's chief oracle, a commentator investors attend to because she makes an intellectually respectable case for their high expectations.
Her particular skill is making sense of otherwise baffling events. She holds regular conference calls with analysts and institutional investors that are just as regularly oversubscribed. "She's smart, and she has been right so far," says Elizabeth Chase, investment analyst for the Strong Shafer Value Fund. "I listen to her conference calls-when I can get in." During the stock market's late-October dizzy spell, Cohen's virtual conference room wasn't just crowded, says Chase, "it was packed." It's easy to imagine that Cohen's audience was looking to her for comfort as much as for cogent analysis.
The events of October tempered Cohen's optimism-but only a bit. In 1998, she says, the U.S. will be "an oasis of growth in a fairly funky-looking global economy" (so much for impenetrable technical jargon). Unlike a large number of Wall Street prognosticators, Cohen just can't work up much of a sweat over inflation. "We see a mild updrift in inflation and interest rates," she says, "but not enough to short-circuit the economy." She's keeping an eye on the employment numbers, but fears of a sudden surge in wage rates-a main engine of inflation-are exaggerated, in her view. "The reported rate of employment overstates the tightness of the labor markets," she says. Her reasoning: Federal surveys distort the picture by classifying certain part-timers, as well as the growing army of downsized corporate executives now toiling as self-employed consultants, as full-timers. Cohen points out that, whatever the government's economists may think, both the part-timers and the consultants are still looking for full-time work. Moreover, she asserts,"higher wages are not at the upper end of worker wishes." Rather, in the age of downsizing and contract employees, job security and benefits are the priorities for a large portion of the labor force. And the few industries that are experiencing upward wage pressures are also enjoying productivity gains that offset the higher payroll costs.
Cohen is equally dismissive of the suddenly fashionable deflation hypothesis. "Many people are using that term pretty loosely," she says, an edge of impatience in her voice. She's familiar, of course, with the statistics that show a steady drop in the prices of some industrial materials throughout the 1990s, but "there is more to deflation than falling prices," she says. "A precondition for deflation is a financial system that can't support economic growth. That's not the case now. Commercial banks around the world are in reasonably good condition, and where they're not, the International Monetary Fund is moving in to impose fiscal discipline." She chides the deflation hawks for forgetting another lesson in basic economics: There is no deflation without declining demand. Although Asia's currency shocks and accompanying political turmoil are crimping business activity, "this is still a global economy that is growing," she says.
Nevertheless, Cohen acknowledges that "the developments in Asia are real." Before the weakness in the region was apparent, Goldman's economists were predicting that the U.S. gross domestic product would increase by a bit more than 3 percent in 1998. After the October sell- off, they ratcheted that guess down by one-quarter to one-half a percentage point. "In a trillion-dollar economy," she says, "it's hard to get much more precise than that."
It's also hard for Cohen to feel much alarm about such a modest hit to economic activity. "The U.S. has a large domestic economy," she says. "On the margins, developments outside the U.S. will have an impact. But in the aggregate, slower growth in Asia will not have a notable impact on corporate profits." And, as is her wont, she spots a seemingly obvious point that some others in her discipline have overlooked. "With regard to Asia," she notes, "we import far more than we export. Some exporters will see a decline in demand, but importers will find their costs are lower." And not every exporter is going to book fewer orders from Asian customers. "Producers of commodity products may see some lackluster demand," she says, "but makers of high-value-added goods may not see much change. Their customers may have nowhere else to go." The subject leads her to something close to a policy prescription. "The United States doesn't need to and shouldn't compete on every level," she argues, "but should focus on areas where it has a comparative advantage. In areas like technology, aircraft, entertainment, publishing, avionics, and financial services, where U.S. products set the standard, we're still seeing some very interesting earnings growth."
Most of the rest of the world doesn't interest her nearly as much. All she'll say about Japan is that its slow growth should continue, and she's hardly more enthusiastic about Europe. "Except for the U.K.," she says, "the general expectation is that growth will be okay, not great."
In her view, Latin America offers a far more hospitable climate for stocks than Japan or Europe. "In the last six to nine months," she says, "while growth in Asia has been slowing, Latin America has been accelerating." Without drawing a direct contrast to the blame shifting and denial prevalent in Malaysia and elsewhere, Cohen notes approvingly that the Mexican government responded to its economic crisis by allowing businesses to fail and consolidate. As a result, "bond markets are stable, and economic growth will continue." And except for the connection "lurking in investors' minds," she says, "Latin America has very little direct link to Asia on the economic side."
Still, as far as U.S. investors are concerned, Cohen says, there's no place like home. It's not her style to single out particular stocks, but she says that a change in market leadership has been under way since last spring, as portfolio managers have shifted away from some of the giant names such as Gillette and Coca-Cola. "Investors are going through their portfolios very carefully," she says. These investors are culling the stocks whose earnings seem to be running out of steam and loading up on those whose earnings prospects still look strong. And what stocks are these? Again, she points to the industries in which U.S. companies enjoy a comparative advantage over their rivals.
Cohen doesn't like forecasting an end to the market's long rise any more than she likes to name her favorite issues. Even when invited to predict when stocks will finally fall from favor, she answers the question by looking on the bright side. "Equities," she says, "should do okay as long as the profits are there." If her take on the superior competitive position of U.S. corporations is right, the profits could be there for years to come.
What could spoil this rather pleasant picture? If Asia's economic retreat lasts longer than the six to nine months she expects, "it will be bad for financial assets." But she refuses to conclude on a down note. Even if Asia's business and financial sectors need a year or more to get their act together, she's sure the region "will show some very interesting long-term growth." In fact, she seems almost relieved that the Asian crisis finally broke into the open. It tested the resiliency of U.S. investors, who responded well, and it removed the top item from her list of worry points for 1998. "If you had asked me three months ago what dark clouds were on the horizon," she says, "I would have said, 'Watch Asia.'"
Her parting advice for investors: "Don't count on the United States for surprises. The real surprises will be happening outside the United States," most likely in Europe and Japan. "My favorite metaphor," she says, "is that the U.S. is like a supertanker: It may not be the most exciting speedboat in the harbor, but it's going to get us where we're going."
source: worth magazine |
