Goldman’s Joseph Cohen: Stocks Look Good Over the Long Term

Tuesday, 21 Aug 2012 02:44 PM

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Stocks may be in for a bumpy ride in the United States with upcoming elections and uncertainty in Europe, but the long term looks brighter, said Abby Joseph Cohen, Goldman Sachs’ senior U.S. investment strategist.

Europe continues to battle uncertainty as to whether debt-ridden countries like Greece will remain in the currency union.

Meanwhile, proposals to lower borrowing costs in larger countries like Spain remain on hold, facing criticism from countries like Germany that oppose allowing the European Central Bank to buy sovereign debt in the open market, which would alleviate default worries in troubled countries.

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

In the United States, elections will take place in November with no clear frontrunner in sight.

Furthermore, at the end of the year, tax breaks are set to expire at the same time preprogrammed cuts to public spending kick in, a combination known as a fiscal cliff that could send the economy sliding back into recession next year if left unchecked by Congress.

The longer term, however, looks good, Joseph Cohn said.

Europe will come to an agreement to firewall the debt crisis, while in the United States, economic indicators such as retail sales, industrial production and consumer sentiment numbers have surprised on the upside.

“This is one of those times while we are comfortable with the medium- to longer-term outlook, we ... are looking at the shorter term, and have some concerns primarily about the political situation not just in United States, but in Europe,” Joseph Cohen told CNBC.

“What we see in our analytical work over the last several weeks is that that risk premium, that fear factor has receded somewhat in the minds of many investors, however.”

European policymakers have not outright rejected plans to intervene in government debt markets, while Greece has asked for time to make fiscal adjustments and may get it.

“First in Europe, there seems to be more discussion along the lines of what we might have expected. There seems to be an unwillingness to drive the situation there to the cliff. People are increasingly hopeful that there will be a long-term workout to the sovereign debt crisis and also the bank crisis,” Joseph Cohen said.

“In the United States …, the most recent economic data have looked somewhat brighter and gives investors a little more comfort.”

While U.S. stock prices have risen, valuations suggest companies remain healthy.

The Standard & Poor’s 500 broad stock index has soared above 1,400 recently, a figure that has precipitated selloffs in the past, most notably during the dot.com boom over a decade ago, as well as in more recent bull runs.

“We think it’s so important to recognize that it’s really the valuation that matters, it’s not just the price but scaling that price for the underlying earnings, underlying [gross domestic product] in the economy, underlying revenue and so on, and so the valuation today at 1,400 on the S&P 500 is actually much more attractive than it was during the prior two periods.

The S&P 500 was trading around 1,415 most recently, but expect it to cool soon especially if it sticks in a 1,415-1,425 range, said Ned Davis Research analyst Will Geisdorf, according to USA Today.

“I would eye the first break above that level with skepticism,” Geisdorf informed clients in a 12-minute video, USA Today added.

“The gains will be hard to sustain.”

Editor's Note: Prophetic Economist Warns: “It’s Curtains for America.” See Evidence.

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