Abby Joseph Cohen on Global Themes and Risks
Abby Joseph Cohen ’73, president of the Global Markets Institute and senior investment strategist at Goldman Sachs, gave a powerful analysis and forecast of the U.S. and global economy and financial markets when she spoke to Johnson students via videoconference as a special guest for Cornell Lectures in Finance on Feb. 6. Cohen predicts that the U.S. economy will experience sustainable growth. “Personal consumption will not retrench,” she said, pointing out that the average household’s debt service payment relative to disposable personal income has reached a level comparable to that of the mid-1990s, indicating an improvement in the affordability of debt. Apart from the dramatically improved outlook for the consumer balance sheet, exports and business investment in equipment have been increasing at a solid pace.
On the other hand, the high unemployment rate in the U.S. is one of the biggest concerns. Declining government spending has played a contributing role. “Private employment has been recovering since 2010, [while] government employment has been declining,” Cohen said. She also drew attention to the highly differentiated unemployment rate with regard to education level. While the unemployment rate for people with a bachelor’s degree or higher is about four percent, it is about 12 percent for people without a high school diploma.
“People with less education … have a much more difficult time finding a new job,” Cohen explained. In addition, the duration of unemployment has been rising. On the brighter side, the recent increase in unemployed workers is partly due to the fact that discouraged workers (people who stopped looking for a job and are therefore not counted in the labor force or as unemployed) are re-entering the labor force. Since the economy is doing better, discouraged workers are looking for jobs again, which means they are counted as unemployed, thereby raising the unemployment rate. But in fact, as Cohen noted, “over the last few months, the number of people who are job losers is going down.” The other concern is “the self-inflicted problem in Washington.” If left alone, the federal budget deficit as a percentage of GDP will likely shrink notably due to cyclical recovery. It has already declined from about 11 percent in late 2008 to under 6 percent. But now the two biggest issues are the sequester, with its “draconian budget cuts,” and the debt ceiling. “Although the debt ceiling was shifted to the middle of May, it’s likely to really hit during ... late July or early August,” Cohen said. Moreover, she pointed out, the more significant budget issue is not the current deficit, but the accumulated debt and the demographic time bomb that is coming around 2022, especially “if we don’t get health care expenditures under control.”
On the financial market side, Cohen noted that the S&P 500 index was close to the highs first reached in March 2000. Stock prices fell sharply after their 2000 peak, but Cohen believes that will not be the case this time. She showed the audience that nominal GDP (measuring overall growth in the U.S. economy) has increased 66 percent since 2000, and the S&P 500 operating earnings per share have almost doubled. “You need to scale share price relative to earnings, cash flow, and a number of fundamental factors,” she said. “...Our conclusion, using several sophisticated valuation models, is that the S&P 500, even though it has more than doubled in price since March 2009, is still not reflective of the fundamentals that we think are in place.
“We have some serious concerns, however, about the fixed-income market,” said Cohen. “Companies have been issuing an enormous number of bonds, taking advantage of extraordinarily low interest rates.” She predicts that inflation and interest rates have probably “bottomed out,” though they will not change dramatically in the next year or two. “Business leaders, policymakers and investors need to seriously contemplate the implications of higher inflation and higher interest rates,” she said. According to Cohen, Goldman Sachs projects that global GDP growth will be around 3.3 percent in 2013. The main weakness will come from the EU and Japan. “We are less nervous about Europe than we were six to 12 months ago,” she said. “We think the actions taken by the ECB are a good sign in terms of promoting confidence in sovereign debt. … But we are concerned about the impact of severe austerity policies taken in some nations where economies continue to shrink.”
Despite the “intense economic and financial market distress around the world,” Cohen was pleased to observe that “there has actually been very little movement towards outright protectionism. …Economic policy going forward has to really look for symbiotic rather than competitive relationships.” Nations must be on guard to see that this continues.
At the end of her presentation, Cohen concluded that the opportunity for U.S. economic growth lies in a metropolitan-level perspective. “Each community has its own skills and strengths. One uniform approach for the entire nation simply does not work well.”
“It’s nice that she gave us the methodology of her approach,” said Carolyn Lu Chen, MBA ’14, after the lecture “She did not only tell us why she thinks equity is underpriced and fixed income is overpriced; she gave us the reason why she thought so. It’s great for us to learn the methodology of her forecast.”
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