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The US economy is not just in recovery, it is now in an expansion, according to Goldman Sachs senior investment strategist Abby Joseph Cohen, CFA.
Growth has varied by sector, as always, but Cohen told delegates at the 70th CFA Institute Annual Conference in Philadelphia that she saw room for optimism. From her perspective, the US economy is looking far healthier than it did during the years in and around the 2008 financial crisis.
Abby Joseph Cohen: US consumer balance sheets have never been healthier. @CAIAAssociation #CFAedge pic.twitter.com/fVI9ZU5OIu
— Keith Black (@CAIA_KeithBlack) May 24, 2017
The US consumer balance sheet is now in much better shape, Cohen said. Household debt service payments as a percent of disposable personal income have fallen from a peak of over 13% in the fourth quarter of 2007 to roughly 10% at the end of 2016. Of course, this is contingent in part on the persistence of low interest rates. Because rates are already low, Cohen expects that a modest rise would not have much of an adverse effect.
Abby Joseph Cohen, CFA sees stock valuations at fair value but bonds overvalued almost everywhere #CFAedge
— Burney Company (@BurneyCompany) May 24, 2017
Cohen did express concerns about fixed-income markets, however. “There is not one market where we think rates are as high as they should be,” she said. If interest rates do move up, they could pose difficulties for countries that had been experimenting with negative rates.
“As a former Fed economist, I understand the argument for negative interest rates,” she said. “As a market observer, I think they are a folly.”
Abby Joseph Cohen CFA of @GoldmanSachs thinks that negative rates will be counterproductive, a folly #CFAEdge pic.twitter.com/AeGCUOPkmg
— Eelco Fiole (@Eelco_Fiole) May 24, 2017
Nevertheless, Cohen remains relatively bullish. She urged policy makers to push basic research and science, technology, engineering, and mathematics (STEM) education. STEM-related investment not only creates employment benefits for individual workers, she said, but also boosts productivity in the broader economy. President Donald Trump’s plans to cut regulations should also stimulate economic growth, Cohen said.
As a final point to support the case for economic expansion, Cohen observed that companies have been allocating more to dividends and stock repurchases in recent years, spending only 58% of their cash on capital expenditures, research and development, and mergers and acquisitions — down from a historical 70% or so.
Looking forward, she expects companies to move away from dividends and stock repurchases and back toward more growth-related investments.
All in all, in Cohen’s view, the outlook for US-led global growth is encouraging.
This article originally appeared on the 70th CFA Institute Annual Conference blog. Experience the conference online through the Virtual Link. It’s an insider’s perspective with archived videos of select sessions, exclusive speaker interviews, discussions of current topics, and updates on CFA Institute initiatives.
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Photo courtesy of W. Scott Mitchell
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