May 18, 2016

Valens Market Phase Cycle Monitor & Corporate Credit Macro View for May 2016


Market Phase Cycle™ Investing Strategy

Investor sentiment appears ahead of management action, spelling volatility


For the first time in several months, management’s confidence around growth turned more positive in April. However, investor sentiment has already grown rather optimistic, and equity market valuations are already pricing in ROA’ improvement. If management’s confidence is confirmed in coming months, with renewed investment and a resumption of ROA’ expansion, equity markets are currently fairly valued. On the other hand, if investor expectations are disappointed, the lower end of the recent market range may be retested.

Current prices require a recovery in earnings growth that will be challenging without investment or operational improvement

Equity markets are currently pricing in corporate ROA’ to stop its recent decline and return to 2014-2015 levels, with continued subdued growth. While management confidence indicators are signaling a potential inflection, they have produced false positives before, and all other indicators of investment signal management is not yet committed to returning to growth, or expecting a near-term earnings growth. Without these catalysts, the equity market may be overvalued currently.

Investor sentiment indicators are growing more optimistic

Investor sentiment indicators are signaling that investors are growing overly optimistic. Without investors focused on risks, and with the market at the high end of its recent band, the risk of the market retesting the lower end of its range is not unreasonable.

Credit fundamentals are supportive of equity markets, limiting downside risk

Even though valuation and sentiment signal potential risks to the downside for the market, none of Valens’ proprietary credit metrics signal risk of a credit crunch, limiting the potential any near-term selloff could turn into a bear market.

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