06/01/19 'I CANNOT ENVISION DOING A 180-DEGREE TURN'

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'I CANNOT ENVISION DOING A 180-DEGREE TURN'

What would it take to turn Abby Joseph Cohen, Wall Street's staunchest stock market bull, into a bear? Her answer: ''Deteriorating fundamentals''--notably, a ''significant'' increase in inflation or decrease in corporate profits. She won't be any more specific, but Goldman, Sachs & Co.'s chief market strategist still expects the fundamentals to improve before the inevitable decline sets in, even though many investors are feeling faint right now. ''After each step up in the market, people feel worse than before because you're at a higher level and have further to fall,'' she says.
As she surveys the investment landscape, Cohen keeps an eagle eye trained on the U.S. inflation rate. A dramatic upturn would be ''especially troubling,'' she says, but adds that she sees no cause for concern as of now--a view she apparently shares with Fed Chairman Alan Greenspan. Despite worries in some quarters about rising labor costs, the Fed's Open Market Committee opted on May 19 not to boost interest rates.
''RIGHT ON TARGET.'' Even so, Cohen has factored a modest rise in interest rates into her second-half outlook. ''There are no significant inflationary pressures,'' she says, ''but the Fed wants to send a signal that they are being careful.'' She sees a parallel to early 1997, when the stock market weakened in anticipation of a Fed rate hike but rallied after it was implemented.
Cohen is no less fixated on corporate earnings. She sees a modest 8% rise in 1998 operating earnings, to $50.50 per share on average for the companies in the Standard & Poor's 500-stock index. ''We've been assuming that the year would start off at a moderate pace and get somewhat stronger in the second half,'' she says. Based on preliminary data, Goldman is estimating that first-quarter earnings were up about 5% to 6%. ''We think we're right on target,'' she says.
Cohen expects the second-half acceleration in earnings to carry into 1999. Her official estimate for S&P 500 earnings growth in '99 is 9%, but she concedes this is largely symbolic. ''All we're really trying to convey at this point is that we believe 1999 will be another year of profit growth.''
In Cohen's view, the added impetus will come from energy, chemicals, paper, and other major industries that have been trailing the S&P average because of exposure to foreign economies notably weaker than the U.S. economy. But over the next year, Cohen expects demand for U.S. goods abroad to pick up, even allowing for the economic disarray now spreading through Asia.
The wild card, in her view, is Japan, the world's second-largest economy. Cohen says she has spent a lot of time conferring with Kathy Matsui, Goldman's chief strategist in Tokyo, and with Goldman analysts who follow U.S. companies doing business in Japan. ''Our view of Japan is not as gloomy as some,'' Cohen says. ''We don't see this wonderful turnaround, but we do think that conditions will stop getting worse'' as the government's recent moves to stimulate the economy take hold. In the meantime, she adds, Japan's weakest sectors--construction, for one--are domestic industries to which U.S. companies have scant exposure.
In Cohen's view, the bull market will likely last at least through 1999 but must die one day. Come what may, she says that she will not be flashing any ''sell-all-stocks'' commands. ''I cannot envision doing a 180-degree turn, because that's just not the way the world works,'' she says. Instead, expect Cohen to reduce the stock market weighting in Goldman's model portfolio from the current 65% to 60% to 55% and so on, easing into bearishness as she eased into bullishness seven years and nearly 6,000 Dow points ago.
By Anthony Bianco in New York

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