What's an investor to do with the US markets riding at an all-time high after the longest run up in history? There are lots of bearish investment managers around who are getting nervous.

Abby Cohen isn't one of the crowd. As managing director of Goldman Sachs investment policy committee she predicts growth will continue into 1998, although at modest levels compared to the sharp increase over the past three years.

The US market has returned to "normal'' levels of fair valuation for stock issues from a period of undervaluation at the end of 1990.

"We (at Goldman Sachs) are still bullish,'' she said yesterday at a Bermuda Society of Financial Analysts meeting. "We have been consistently bullish since 1990...We are not as exuberantly bullish as we were because the market is not as cheap. We expect a moderate pace of growth in a market which is reasonably priced. In 1998 there is still room for the market to grow.'' For the past three years there has been price appreciation of between 25 to 30 percent per year in the growth of the main indicies. Goldman Sachs took the contrarian view in 1990 that the US stocks markets were primed for growth, she said.

There was a "dramatic undervaluation'' of stocks, and the US economy was undergoing fundamental change to become services dominated with a technology driven, high value-added manufacturing sector. People had also come to expect the low level of inflation to continue.

Now, while the price to earnings (P/E) ratio of the Standard & Poors 500 index is currently about 19 times estimated 1997 operating earnings per share, she considers this level as the "normal'' level of valuation for a low inflation economy.

During prior periods of mild inflation the price to earnings ratio of stock has typically ranged between 18 to 22. The low inflation scenario usually means earnings and profits will continue to grow.

"A P/E ratio of 19 is not too high,'' Ms Cohen said. "...It is not an overvalued market.'' The US economy is reaping the benefits of earlier decisions by corporations to restructure, declining federal deficits, and rising household savings rates.

With these factors in place Goldman Sachs predicts investors will continue to remain confident and price to earnings ratios will expand.

The growth in stock prices will transfer to the small and middle capitalised companies compared to the larger capitalised ones. Goldman Sachs is also predicting 1998 will mark another year of growth for corporate profits, cash flow, and dividends.

"We are now past the hill and seeing sunlight,'' she said. "There is good balanced growth coming from many sectors. The jobs being created are not of the hamburger flipping type. Seventy percent of the jobs being created are paying wages above the median level being earned.'' She is expecting total returns to drop back to between ten to 12 percent which is "not bad''. However the market will return to its "normal'' level of volatility from a period of "abnormal'' low volatility.

"When the market is cheap we don't worry about the disappointments,'' Ms Cohen said. "When you pay fair value, the market price, investors become more sensitive.'' But while the US has passed through a period of pain with the transformation of the economy, the rest of the world has not. Over the past 12 years the US has diversified its export economy, and manufacturing jobs have shifted to growth areas such as aerospace, high technology and telecommunications sectors. The rest of the industrialised countries have yet to go through a similar transformation.

She expects the Federal Reserve, which meets today, to increase rates sometime in the future, due to concern about rest of the world's economies, which are lagging far behind the US.

However the rate increase will only be a "flu shot'', as occurred in March, to let people know the Federal Reserve is watching the economy. It's more a matter of "tapping on the brakes'' slowly so growth will be substained over a longer period.

The rest of the world's economy is predicted to have modest growth as industry attempts to restructure. The restructuring will slow growth as resources are reallocated in the economies and job growth is transferred to other sectors.

She is also concerned that growth in the US and the shift in the economy toward more skilled jobs is not being matched by the required level of training.

"Each transformation of the economy has been accompanied by a change in education,'' Ms Cohen said. "Here we are marching into a new economy where new skills are required and a higher level of education. My concern is: Are we providing that?'' She said some people are getting the necessary skills while others are not. A widening gap in incomes between those with the skills and those without will likely occur, leading to social problems.

Given the scenario of modest growth in the US economy Goldman Sachs continues to be bullish on the technology stocks and specialised services, such as the financial sector.

The company's investment policy committee forecasts equities will continue to outperform bonds over the next ten months. The committee suggests moderate cash positions for balanced portfolios.

Large pension funds should hold between 40 to 75 percent of their holdings in equities, ten to 45 percent in bonds, and zero to 35 percent of holdings in cash and commodities.

A large equity mutual fund should hold between zero to 40 percent in cash, and between 60 to 100 percent in equities. A smaller agressive pension fund should have up to 50 percent holdings in cash and commodities, up to 55 percent in bonds, and up to 100 percent in equities, according to Goldman Sachs.