Surviving a Cruel World

Comment by Mark Lacter

Remember Abby Joseph Cohen? She's the chief investment strategist at Goldman Sachs who in the late 1990s was the toast of Wall Street for her resolutely bullish (and at the time prescient) stock market predictions. Cohen was so widely followed and her positions so unfailingly cheerful that when the market experienced an occasional downdraft, all it took was an affirming interview or investment memo to get the stocks back in positive territory.

Well, Cohen is still upbeat. Just last month, she projected that the Dow would reach 11,300 by next year and that the S & P; 500 would hit 1300 projections based on an economy that she considers increasingly sound.

Except this time, no one is paying much attention to Cohen's forecasts, not with the Dow hovering around 9000 and the S & P; 500 just over 900. Cohen has succumbed to the inevitable: her winning streak has come to a crashing halt.

In Wall Street's prevailing wisdom, Cohen's mantra of up, up and away has been replaced with a bearish anxiety that, some believe, could linger for months if not years. Jim Paulsen, chief investment officer of Wells Capital Management, gloomily told Barrons that "the rules of the game seem to be changing in ways likely to shatter the expectations of millions of investors."

Paulsen, in fact, ventured that the time-honored buy-and-hold regiment "might at long last be destined for the ash can of history."

History offers little comfort. Suddenly, all the pundits are dredging up charts from the late 1960s and 1970s, when the market barely moved and price earnings multiples nosedived. Robert Shiller, the Yale economist whose book "Irrational Exuberance" chronicled the 1990s market mania, now expects stocks to be flat to negative over the next decade.

There's no telling whether his expectations will prove any more reliable than Cohen's. Right now, in the midst of the daily carnage, it makes sense. But among optimists there's also the "darkest before dawn" theory that has the market making its move just around the time that most investors have written it off.

And when might that time happen? Listen to CNBC and everyone coughs up an opinion. But it's all just noise nobody knows.

The Federal Reserve Bank of Atlanta recently studied the past 16 years of economic forecasts compiled by The Wall Street Journal and found that the so-called experts did their best when the economy was humming along and their worst when the economy was at a turning point. (What a surprise!) In July 1990, just as a recession was budding, the accuracy rate, on a scale of 0-100, was a pathetic 15. Last January it was 17.

In a weird way, there's solace in the forecasters' cluelessness. Maybe sourpusses like Shiller and Paulsen will turn out to be wrong. Maybe we are in fact living through the market's darkest moments, and maybe we're about to see the return of the bull.

Whatever happens will require the individual investor to make some tough decisions about his or her portfolio and that's not a bad thing. For too long, we've assumed that stocks were like bank accounts, only more profitable. Now that everybody has grown accustomed to monthly brokerage statements with lots of parentheses (losses) in them, perhaps we'll pay more attention to yields, diversification and sell orders.

It's a cold, cruel world out there and Abby Joseph Cohen is fresh out of answers.



Mark Lacter is editor of the Business Journal. He can be reached at mlacter@labusiness journal.com.

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