Abby Joseph Cohen: Economy to Rebound in 2008

Abby Joseph Cohen, chief investment strategist at Goldman Sachs, says the U.S. economy will rebound in mid-2008, but the next few months will be bumpy.

In an interview with CNBC, Cohen explained why she remains bullish, how the recovery will look -- and what she foresees for the financial sector.

She says the S&P 500 will hit 1,675 by the end of 2008, a gain of 14.5 percent over 1,463 at market close Tuesday.

Though Goldman Sachs had predicted that the S&P will be at 1,600 by 2007's end, she cautioned that that call came from a report issued in the spring -- before the wild market swings of the summer. "We try to think ahead, 12 months into the future -- so that 1,675 is the number to look at."

"Mirror Image of 2007"

"2008 will be the mirror image of 2007," Cohen said: Just as this year began with strong indicators and low volatility fading into a weakening market beset by high volatility, so next year will begin with "concerns over economic growth."

Growth will decelerate but "some staple-oriented names will do well," Cohen said.

However, by mid-year 2008, the U.S. economy will look accelerated again, the strategist predicts. "At that point, recessionary fears will fade away and the market can do much better."

Even during the challenging months to come, Cohen believes the U.S. economy will be able to avoid recession, thanks to several factors:

- U.S. exports are growing 10-12 percent and "should prove a partial offset to weak housing";

- "Very robust" capital spending by corporations, and state and local governments; and

- A "very attentive central bank." Cohen says that the Federal Reserve has proven by both its interest rate policy and its "public commentary" that it is "paying attention" -- and will provide liquidity where and when needed.

Financial Firms' Comeback?

"It's not time yet" to get back into financial services, Cohen said -- attributing the operating decision to an unnamed Goldman Sachs figure.

However, the return to banks and insurers will come soon: she believes that fair-value accounting will cause U.S. firms to "come clean quickly" -- and render them viable investments again, far faster than their Japanese peers, which took "12 to 13 years" to write down non- and underperforming assets.

In addition to that "much cleaner look" for balance sheets she expects to see in early 2008, Cohen pointed to the number of eager bidders who've surfaced, raising interest in troubled companies and distressed portions of company portfolios.