Goldman Sachs & Co. Senior Investment Strategist Abby Joseph Cohen says equity markets are priced to continue to perform well, but she sounded alarms about fixed income.
“The [equity] markets, in our view, are not overvalued. The markets that are overvalued are the fixed-income markets,” Cohen told a large crowd at the 70th CFA Institute Annual Conference in Philadelphia today.
A Goldman analysis of 10-year government bonds around the world shows there’s not one bond where the firm thinks yields are as high as they should be, Cohen said. “This is problematic. We think that yields can and should go higher. They are already so low it’s not going to impact the economy per se, but we do worry about the portfolio impacts. When yields go up, prices go down.”
Cohen added more money in 401(k) plans in recent years has been flowing into fixed-income funds, which are more risky than investors realize.
Negative interest rates in many countries are also a big concern of hers. “As a former Fed economist, I understand the argument for negative interest rates. As a market observer, I think they are a folly. I think they will prove to be counterproductive in the countries where negative interest rates have coincided with a brief improvement in those economies. I think it’s more related to the foreign exchange channel. Very low yields pushes down the currency, improves the export picture.”
Cohen also spent a large part of her presentation assessing the U.S. economy and highlighted contradictions coming from Washington. For example, she noted that the expected growth rate in U.S. Gross Domestic Product is about 2 percent, an expectation that has been the same for many years. Yet, President Donald Trump’s recent budget proposal is based on GDP growing at 3 percent, she said.
Both Republicans and Democrats during the recent U.S. presidential election focused on imports being a major problem for the domestic economy. But exports and business equipment spending led us out of the Great Recession, she said, and exports are now 60 percent higher than just a few years ago, although growth has slowed.
Contrary to popular belief, the sector where spending has contracted the most is federal government spending, Cohen added. Over the last decade, government spending overall has barely budged -- federal government spending has dropped and that has been a drag on GDP and employment, while state and local spending have increased, she said.
“It’s a problem. The population is growing and you need to provide services,” Cohen said. Other countries have been spending more heavily on infrastructure and broadband services than the U.S. does. The lack of spending on broadband reduces job opportunities outside major cities, she added.
Consumer spending, which accounts for 65 percent to 70 percent of U.S. GDP, is the single largest segment of the economy. It took six years after the recession for consumer spending and jobs to get back to pre-crisis levels, Cohen noted.
The country is now in a recovery, although it’s been slower than most people would like to see. “The nation is looking far healthier than it did previously,” Cohen said.
She observed, though, that the U.S. economic recovery has been uneven, benefiting those with at least a bachelor’s degree much more than others with less education. Also, the labor force participation rate of women had been growing for decades but has now fallen off, possibly because baby boomers are staying in the workforce longer and from the lack of availability and high cost of quality child care, Cohen said.