Goldman's Cohen: Next Recession Far Off in Future

[00:00:00] Speaker 1: what is the single determinant that says you should be in stocks let's clear [00:00:04] Abby Joseph Cohen: something up I am NOT a relentless bull there have been many times during my career where I have taken a much more bearish and cautious stance and if you think the hate mail is interesting now you should see so what about the current situation the economy is getting better and while the stock market has improved it has not risen as much as the economy has and so for example over the last three years since the recession ended summer 2009 GDP has increased corporate profits have increased and we are now seeing a momentum in the economy would suggest that the next recession is pretty far off into the future we've got some [00:00:41] Speaker 1: technical questions but I want to take you back decades your work with Lewis Rukeyser there's so many people that watch the show that listen to this show that have missed this market it's the no one's in the market show you look at a stock like Danaher and then it's just a straight-up move for those people who are at the dock how do they get back on the boat they have to remember that the [00:01:03] Abby Joseph Cohen: key to successful long-term investing is diversification and one of my great concerns is not the opportunity cost of missing the equity market but also staying too long in an asset like bonds that may in fact lose value if the economy continues to do well interest rates go up we may see that bond prices go down so that's something neat people need to keep in mind but don't make the change all at once we really need to see gradual adjustments important do you [00:01:32] Speaker 3: worry about the day that the Fed has to exit the market and unload some of this the massive the trillions of dollars in stimulus that it's built up everyone is [00:01:41] Abby Joseph Cohen: worried about it and everybody is already talking about it which is a very good thing and clearly what we have is not just the Fed but many people on the sidelines thinking about the ways in which this can be done in a way that's not terribly disruptive you know at some point in every market cycle interest rates do rise and we think that rise here will begin some months or quarters from now but keep in mind that inflation is quite low in the United States and that by itself should provide something of a dampening effect on the rise in rates we had a [00:02:13] Speaker 4: single best chart yesterday Abby that talked about how a few good days make all the difference since the bull market began annualized returns for the S&P 500 about 20% without the three best days of every year that goes down to 9% without the five best days of every year it goes down to 3% what does that tell you about [00:02:29] Abby Joseph Cohen: conviction in the market what it also tells us other than about conviction is something about what personal financial advice should be and that is don't try to be a a timer don't try to be a day trader but take an intermediate to long-term look if equities appear to offer good value and we think they do 12 month price target on the S&P 1650 and you have some longer-term concerns about bonds you should begin to make that adjustment but what you're pointing to in terms of this volatility of the market is something that appears even more volatile when you look up a little bit too close the reality is that volatility measured by standard deviation of the market is back down to historic levels that is we have come from a period where volatility was four times normal right we're back to [00:03:16] Speaker 1: normal so we come back to normal we're back to the VIX that I talk about folks all the time it it's 13 how do you discern dividend growth versus being a yield hog where does Abby Joseph Cohen you're with David Costin you're sitting at a big table at Goldman Sachs with big money and you got to sit there and go where's that tipping point between 2.8% and 3.2% how do you determine that well it's not just [00:03:38] Abby Joseph Cohen: what we're looking at in the aggregate market but by individual companies what we know from long periods of history is the stocks with the highest yields often don't give you the best return because these are companies that are cash rich but they don't have anything to invest it in so the much better combination is companies that have some cash can invest it can increase the return on equity return on invested capital do capital give us an example I gotta make some money here I I have not been cleared this morning to give you specific but but there are plenty out there and it's the combination of strong return on equity or return on invested capital and dividend growth not the high yield it's the [00:04:17] Speaker 3: growth in the dividend that would you stay out of the equity markets abroad in [00:04:21] Abby Joseph Cohen: Europe in Japan in China our teams are seeing opportunities there again for intermediate to long-term investors among the most interesting right now are in Asia Japan and Korea both expected to have very strong profit growth this year obviously there's some currency issues for dollar-based investors and even in Europe our team believes that by the end of this year some of the fears will abate and they see good opportunities and selected markets including the UK stocks [00:04:50] Speaker 4: in the US have rallied Abby as companies resist deploying some of their record hordes of cash does a rising stock market influence them to use up some of that [00:04:58] Abby Joseph Cohen: cash I think what you're talking about before in terms of confidence building well it's not just consumer confidence it's also investor confidence and the confidence of CEOs and when they feel better about the future they begin to pick up that spending and we've seen it capital spending plans in the United States are on the rise and we think CapEx could be a double-digit levels in the quarters ahead when you look at Wall [00:05:22] Speaker 1: Street reconnecting with Main Street you've been doing this long enough to know there was a time where Main Street had us a linkage to Wall Street they got to get that back how are we gonna get that back I don't want you to speak for mr blank fine but how do we get back that understanding that Wall Street has a [00:05:38] Abby Joseph Cohen: service to America you know it's not just Wall Street it's banking system not just here in New York but around the country we have to understand that we're all part of the same system and that financial services companies are the intermediaries we're the ones that try to find the matching point the meeting point between those who have capital and would like to invest it those who have capital would like to save it and obviously we need to have confidence all around