U.S. stocks look good value in the medium to long term, even if short-term prospects are clouded by financial woes in Europe and jitters over the U.S. presidential election, Goldman Sachs’ senior investment strategist Abby Joseph Cohen said.
Ms. Cohen - still known for her steadfast bullish view on stocks through the 1990s, when the U.S. market experienced one of its strongest rallies in history - said share prices in the S&P 500 index were, on average, trading at 13 times forecast 2012 earnings, arguing this looked cheap compared with previous eras of low inflation.
“On average, over history when inflation is under control - and inflation is under control now - the P/E ratio is 18 times earnings,” Ms. Cohen said in an interview with Reuters on the sidelines of a conference.
“Clearly it suggests stocks are not expensive on that basis,” she said. “When we look at some cash flow measures of stock valuation, the U.S. stock market looks like it is offering good value.”
Goldman Sachs projects the S&P 500 will stick to a volatile near-term range of between 1,250 and 1,350 points. It was at 1,348 early on Thursday, off a year’s high of 1,422.38.
In the near term, “in many developed equity markets there is already a great deal of gloominess”, Ms. Cohen said, citing nerves over the election and outcome of euro-zone discussions.
She said that while the U.S. economy in the second quarter was likely to grow less than in the first three months of the year, there was growth and it was unlikely the United States would slip back into recession, with economic growth expected at around 2 per cent in 2012 and in early 2013.
At the same time, the largest U.S. companies were strong, profitable since mid-2009, had good balance sheets, were generating cash and reinvesting in new equipment.
“The problem is that investors are nervous,” Ms. Cohen said, noting concerns about Europe, the deceleration of growth in China and U.S. elections from a policy perspective - both in terms of who will be president, and who will control Congress.
“What matters most now is the European situation,” Ms. Cohen said, citing a high correlation between European stocks and U.S. stock futures prior to Wall Street’s daily opening.
That is followed by concern over slowing grow in China, where exporters based in Asia are feeling the effects of recession in Europe and domestic demand in China has weakened.
But U.S. exports continue to grow. Some 18 per cent of U.S. exports go to Europe, but 44 per cent go to Canada and Latin America, which are faring well, she said.
With the global economy expected to expand 3.2 per cent this year, “our intermediate and long-term view on U.S. equities is positive,” Ms. Cohen said.
Even after the elections are over, there remains a host of fiscal issues to tackle, such as expiring Bush tax cuts, a rise in the debt ceiling and the continued funding of Medicare as the population ages and baby boomers retire, she noted.
As such, investors with long time horizons are finding opportunities.
“Companies are using their strong balance sheets to invest heavily in equipment for long-term growth. They are also repurchasing shares and engaging in merger and acquisition activity,” she said.
“Portfolio investors are directing their attention to underpriced public equities, venture capital and private equity.”
Global interest rates in a few year’s time will likely be higher than they are now. “And if rates are rising, bonds may not be as an attractive place to be invested. So, when we look at things that are equity and equity-like, it seems like that is where the opportunities are,” she said.
“Most of the opportunities are related to what will be growing - which countries and which economic sectors will be growing and how they are priced.”