Although the economy is growing by as much as 4.5 percent in the current quarter, it’s expected to slow in 2010, well-known market analyst Abby Joseph Cohen told CNBC.
“Next year, our GDP forecast is below consensus,” said Cohn, chief equity strategist at Goldman Sachs. “Under normal post-recession conditions, we would be expecting GDP next year of 3-3.5 percent in 2010, but we have trimmed that number down to 2.5 percent because of continued concern about labor markets and household balance sheets which continue to de-lever.”
While debt remains a problem for households as well as federal and local governments, said Cohen, the average corporation is now flush with cash.
“Many of them have been using their reasonably good profits over the last year or so, even as the recession was coming to an end, to rebuild their balance sheets,” she said. “And those cash positions we think will be used for something in 2010.”
Goldman’s U.S. portfolio strategy team expects the S&P 500 to be between 1250 and 1300.
“We’re seeing many consumers are coming back, but very importantly we’re seeing very good growth in exports but also in business investment, especially for equipment and things that enhance productivity,” she said. “And we expect less pop from stimulus, but that’s still a good environment from the stock market.”
Meanwhile, the Fed must do a balancing act between watching inflation and the employment situation. Although the Fed would like to keep interest rates low for as long as possible, it’s getting ready to withdraw extra liquidity that was pumped into the system during the worst part of the credit crisis, said Cohen.
“For policymakers, let’s keep in mind this is not just a cyclical employment problem related to the severity of the recession but also a structural one,” she said. “Beneath the surface, we were seeing problems in terms of a hallowing out of certain portions of our labor market for the last ten years.”
Median household incomes adjusted for inflation, for instance, haven’t risen in ten years, she said.
“Some of the short-term fixes have been discussed widely,” she said. “The longer-term fixes have to do with raising the educational attainment level of the average worker in the United States.”
Meanwhlie, many investors are pricing in some concern about inflation rising, said Cohen, and extra capacity is one of the most important things that drives inflation over a longer-period of time.
“Capacity in the nation’s factories and mines depending upon industry is only operating at 70-75 percent,” she said. “But one of the areas that we have the most spare capacity, unfortunately is the labor market with a 17 percent unemployment rate when you include those people who are underemployed or discouraged workers.”
Cohen’s group has advised some investors to become more involved in commodities and some of the better opportunities next year may come from energy.