Abby Joseph Cohen tells audience at Fairfield University that market volatility will calm when economic signs become clearer
On a day that saw Wall Street reeling in the wake of more news of the subprime mortgage fallout impacting banks, Goldman Sachs' Abby Joseph Cohen said she foresees the slowing of the U.S. economy. And though she emphasized that a recession is unlikely, Cohen noted that the Federal Reserve decision-makers will be keeping a "watchful eye" on conditions in the financial markets and labor markets.
Cohen, who was speaking on "The return of volatility to capital markets: How investors can survive and thrive," as the 2007 Charles F. Dolan lecturer at Fairfield University, had encouraging news for investors. She said that the cumulative three-quarter-point (75 basis points) cut in the Fed funds interest rate by the Federal Open Market Committee of the Federal Reserve was aimed at calming financial markets and boosting the confidence of consumers and business leaders. The timing was important, as retailers were making decisions in late summer and early autumn in preparation for the Christmas selling season. "We feel that the Fed's actions bolster the confidence of economic decision makers, not just investors."
She also noted some positive signs with regard to labor, especially as new jobs are being created. In addition, recent government reports show that worker productivity is increasing, and is more than three to four percent higher than one year ago. This means that workers can be paid more than last year, without any upward influence on inflation. In addition, the average household's income is rising faster than inflation, and "many families are better off today than a year ago."
Cohen noted that the U.S. stock market, using measures such as the Dow Jones Industrial Average and the S&P 500, is trading at levels last seen during the bubble of 1999-2000. "However, the market is not overpriced." Since that time, the economy has grown larger, corporate profits have increased about 85 percent and cash on corporate balance sheets has more than doubled.
She also observed that the price-to-earnings ratio of the S&P 500 is now about 15, compared to 25 in 2000, and the long-term average of 18. This suggests good value in the stock market. "The US economy is shifting, and we expect it to grow more slowly in the coming months. The sources of growth are rotating, away from housing and the consumer, and toward industrial spending and exports."
New housing construction is no longer a source of "economic energy" in the United States, she said, noting that the housing sector has been declining since late 2005 and there has been recent slowing in spending by consumers. However, non-residential construction, which includes the building of new offices, factories, schools and roads, is growing at about 15 percent per year. Corporate investment on computers, software and telecommunications equipment is also growing.
Another robust area of the U.S. economy is foreign trade. The United States is the largest exporter in the world of many items, including technology, industrial goods and agricultural products. Exports have been growing at more than eight percent rate. The U.S., not China, is the world's largest trading nation.
With the price of oil approaching $100 per barrel, the questions from the audience included the impact of high commodity prices. Cohen noted that the strain is felt mainly on lower middle-income families and, in the corporate sector, on companies that use a great deal of energy, such as airlines. Even so, the average economic impact is muted by the fact that all commodity costs combined are less than 10 percent of total costs in the U.S. "Unfortunately, some of the most affected families are also those now trying to cope with the upward adjustments in their mortgage costs."
The audience warmly received Cohen's comments regarding the growth in environmental awareness among investors and companies. The amount of money that is now invested by those who indicate they are concerned about environmental issues has risen to about $4 trillion, and Cohen referred to this as "critical mass." About half of the companies in the S&P 500 are providing shareholders with information about their environmental footprint, including greenhouse gas emissions. Cohen noted, "Shareholders and companies alike are saying that they care about the environment."
She added that the deforestation of large tropical rainforests, such as those in Brazil and Indonesia, are also important factors in the climate discussion. For example, the burning of these trees adds to greenhouse gases and reduces the capacity to absorb the carbon dioxide.
Cohen was asked about the funding of Social Security, especially as the baby boomer generation reaches retirement age. She indicated that the Social Security shortfall could be dramatically reduced through measures such as rising the retirement age for those just now entering the workforce. The 65-year-old retirement age was set during the 1930s when average life expectancy was only 63-years-old. Retiree healthcare is a larger problem, with Medicare liabilities at least four times larger than those of Social Security. She expects that healthcare, for current workers and retirees, will be a major issue in the 2008 Presidential election. "Healthcare must be addressed by our next president, whoever she or he is."
Media Contact: Meg McCaffrey, (203) 254-4000, ext. 2726, email@example.com
Posted on November 12, 2007
Vol. 40, No. 107