Step Aside, Elaine. Now, The Big Name Is Abby
Investors were already getting skittish when strategist Abby Joseph Cohen of Goldman, Sachs & Co. offered an upbeat forecast for the second half of 1996. In her July 2 report, she argued that good corporate earnings and a benign interest-rate backdrop would send the Standard & Poor's 500-stock index to 700, or 6000 on the Dow Jones industrial average, by yearend. At that point, the Dow stood a little above 5700.
Within days, Cohen's forecast looked like a loser. A lethal mix of higher interest rates and disappointing earnings reports sent stocks reeling. As the Dow shed nearly 400 points over the next three weeks, Cohen kept phoning clients with reassuring words and writing reports that refuted bearish scenarios. Says Cohen: "I felt like an athlete that trained long and hard for the big event and was finally put to the test."
Now, the Dow is over 6000 and the 44-year-old Cohen, of the borough of Queens in New York City, wife of a labor lawyer and mother of 16-and 10-year-old daughters, is wearing the gold. She's grabbed some of the spotlight from rivals such as Byron R. Wien of Morgan Stanley & Co. and independent Elaine M. Garzarelli. Wien recently recanted his April forecast of a 1,000-point Dow decline. Garzarelli's sell signal came July 23, the day the market hit bottom. She remains bearish, looking for a 15%-to-25% decline.
Cohen looks especially heroic to her clients. "I used to think Abby was great," says Richard S. Strong, chairman of Strong Funds, with $22 billion in assets. "Now, I think she's incredible. She's visionary." Earlier this year, says Strong, he was convinced the economy was heading for recession, but Cohen persuaded him otherwise. "Abby has a high degree of intellectual self-confidence because her conclusions are always based on her own rigorous analysis," says Richard B. Hoey, chief economist at Dreyfus Corp., who worked with Cohen during the 1980s at Drexel Burnham Lambert Inc. Although Cohen failed to forecast the treacherous bond market of 1994, her overall performance since she joined Goldman in 1990 has been top-drawer, and she was promoted to managing director on Oct. 16. "She should have been made a partner," says one client.
There's no magic formula behind Cohen's forecasts, just old-fashioned fundamental analysis. "We look at what's going on in the economy, with companies, and what's going globally," she says. "We then look at how securities are valued, and if they are attractive given the economic environment. Finally, we also look at fund flows in and out of markets." She uses computer models, too, but very carefully. "My first job was as a junior economist at the Fed, and I learned right away that models blow up if the economic environment changes," she says.
Indeed, she argues that what leads many investors astray is that they hold onto old ideas about the economy and the markets without observing what's happening now. For instance, some argue that given the history of economic expansions, an inflation surge is overdue.
MORE PATIENCE. What that argument misses, says Cohen, is the change in inflation expectations. "In the 1970s, whatever you bought at the supermarket on the last trip was a few cents higher on the next trip," she says. "So you bought two to beat the next increase. Businesses did the same, and built excess inventory, figuring they could sell it for more later." Such behavior actually fed inflation. Today, consumers wait for sales and companies don't have pricing power, so they keep inventories lean.
This new behavior also helps to prevent the excesses in the economy that lead to recessions and produces a longer economic expansion. Back in the early 1990s, Cohen first characterized this economic expansion as "Silly Putty." She got the idea while working at home one day and pressing a wad of the kids' playstuff onto a sketch she had drawn of the typical business cycle, which looks like the letter S turned on its side. The image was transferred to the Silly Putty, and she lifted it, and pulled the wad sideways. Lo and behold, she ended up with a picture of a long, muted business cycle. The metaphor struck a chord with U.S. investors, but left Japanese clients puzzled. On her next trip to Japan, Cohen brought along 20 packages of Silly Putty, demonstrated its use, and gave it to clients as souvenirs.
With an elongated economic expansion, Cohen says, you get a longer bull market. Her next target: 750 on the S&P, about 6400 on the Dow, a goal reachable in the next six to 12 months. That's not necessarily the end of the bull market, she says, but only as far as her analysis has gone. Abby Cohen does not speak before her homework's done.