Stocks have lots of room to run, said Goldman Sachs senior investment strategist Abby Joseph Cohen at the Bloomberg Hedge Fund conference in New York Wednesday morning.
Cohen, a 22 year veteran of Goldman Sachs (GS), estimates that even after the 2012 market rally, stocks could rise another 10% to 15% in 2013. While Congress has given the U.S. population reason to worry about taxes and the fiscal cliff, the overall fundamentals of the U.S. economy are healthy, and consumers have money to spend, Cohen said.
Americans are carrying less personal debt as a percentage of their income than anytime since the 1990s, Cohen said. Large corporations have excess cash thanks to strong fundamentals and because they've been able to borrow money in an environment of low interest rates.
Moreover, the U.S. has been reducing its debt relative to its growth domestic product during the past few years. She noted that debt was 4% of GDP for the fiscal year that started in October compared to an 11% ratio in 2008.
"We are slowly growing our way out of the most extreme version of the debt crisis," she said.
Still, Cohen said the fiscal cliff is a concern. If Congress fails to resolve the fiscal cliff before year-end, the beginning of 2013 could be shaky in the stock market. But Cohen thinks gains in the second half of the year will make up for any troubles in the first half of 2013.
Cohen also expects European stocks to rally in 2013. While Europe will continue to face problems, Cohen thinks stocks there are priced favorably.
Cohen's bullish predictions were not a huge surprise to investors who have followed her calls. For most of the duration of her career on Wall Street, Cohen has been seen as unabashedly optimistic about the U.S. economy and corporate profits.
So what should keep investors up at night? Bonds. "The next big move in bonds will be down," said Cohen. On the conference sidelines, Cohen cautioned that she's not expecting that the bond market will drop anytime soon, but that the end of the multi-decade bull market in bonds is closer to ending than it ever has been.
Cohen was not the only panelist at the Bloomberg conference to warn investors of a potential pop in the bond bubble.
Jacob Gottlieb, chief investment officer of Visium Asset Management, said that at some point investors will not be willing to put up with the low yields they're receiving for bonds. When that happens, Gottlieb said investors should expect a broad exodus from the fixed-income market.
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