When fundamentals, sentiment and credit point the same way, don’t overthink it

As highlighted in the September letter, equity markets tend to have strength in Q4. Even after a month where the market continued to move higher, investor sentiment remains relatively muted. This, combined with continued building earnings growth trends, offers market tail winds....

Santa Claus is coming to town – someone should tell equity investors

The seasonal strength of the equity markets into Q4 and through the end of the year are a well-known phenomenon. This year, they are likely to benefit from a combination of overly cautious investor sentiment going into Q4, and continued building earnings growth trends....

The weighing machine continues along, but the voting machine is overheating

Ben Graham said “in the short-term, the market is a voting machine, while in the long-term it is a weighing machine.” *...

Cross Another Concern Off – Moderating Inflation Facilitates Premium Valuations

The most important factors that drive valuation multiples for individual companies surround a company’s earnings growth potential. As we have highlighted in recent editions of the Market Phase Cycle, earnings growth remains robust....

More and more fundamental factors point to a growth acceleration

In October 2016, management sentiment indicators started to flag positively, even as the market remained uncertain. This was followed by positive newsflow and earnings upgrades showing fundamental acceleration....

Fundamental storm clouds are receding, so news related sell-offs offer opportunity

Political news flow has introduced market volatility, but fundamentals have actually been improving....

When sentiment reaches neutral levels (like now) in a Stage 2 bull, be a buyer

In a Stage 2 bull market, momentum pushes stocks higher and investor sentiment rarely reaches negative levels....

Not to be a broken record, but when this next dip comes (and it will) buy it

Fundamental and management sentiment factors continue to point to a positive trend in underlying corporate profitability and growth, justifying current premium valuations. However, investor sentiment indicators remain overly effusive, creating reason for concern about increased volatility with any potential bad news....

All signs still point to longer-term fundamental tailwinds, but near-term volatility

Fundamental and management sentiment factors continue to point to a positive trend in underlying corporate profitability and growth, justifying current premium valuations. However, investor sentiment indicators remain overly effusive, creating reason for concern about increased volatility with any potential bad news....

Overly bullish investors point to the likelihood of a market dip, but be sure to buy it

Since the December Market Phase Cycle, where we highlighted that short-term sentiment had gotten ahead of admittedly bullish fundamentals, the market has been largely sideways. However investor sentiment indicators have not worked off their excesses, and remain exceptionally bullish, spelling risk for a short-term correction. But continued positive indicators around growth accelerating for the first time in years, and limited credit risk mean that any dip is an exceptional buying opportunity ahead of a 2ndstage bull market....

Growth is emerging – but markets need to pause for fundamentals to catch up

Since Donald Trump was elected on 11/8 markets have risen by 6%, driven by potential benefits from his plans, and from improvements already seen in the economy. However, with short-term sentiment indicators now at extended levels and substantial capital having been deployed into the market, a period of settling, or a nearterm correction early in 2017, may be warranted before valuations and the market are likely to move higher....

Green shoots of growth are starting to emerge post-election

Equity markets expect continued subdued growth and ROA’ reaching historic peaks. Expectations that have been correct for most of the past 5 years. However, growing management confidence, renewed easing of credit standards and a changed political environment pointing to signs that growth may be just around the corner. This could lead to earnings growth that would warrant equity upside....

With many catalysts, and all conflicting, what to do? Wait.

Traditional multiples are at elevated levels and adjusted metrics point to a fully valued market. But long-term investor leverage metrics are low, implying potential for incremental investment
in an environment with limited alternatives....

Corrections remain buying opportunities due of lack of investment alternatives

Correlation levels have spiked recently, signaling potential for continued near term volatility, especially with near-term sentiment indicators stretched. But investors have substantial dry powder available based on credit balances, and based on the trillions of dollars currently parked on zero-interest bearing debt. Even with current fully valued equity markets, a rotation away from fixed income into the equity markets could facilitate upside....

“Net/Gross PP&E” levels are yet another indicator that U.S. firms are reluctant to invest. This forestalls any growth cycle and contributes to market multiples remaining at 20x to 22x Value-to-Earnings ratio and thereby a sideways to slightly upward S&P 1500...

Maybe sentiment isn’t too extended – Interest rates and leverage offer upside

Short-term sentiment indicators remain very elevated, and the US equity market remains fully valued. But investors have substantial dry powder available based on credit balances, and based on the trillions of dollars currently parked on zero-interest-bearing debt. If investors start deploying leverage as they have historically and move money away from fixed income, there could be more upside in this market, even though fundamental upside appears limited....

ROA’ forecast revisions are a positive, but excessive investor optimism is a risk.

After positive ROA’ forecast revisions, 2016 ROA’ is forecast in line with market expectations, as is growth, implying market expectations are reasonable. However, investor sentiment indicators have all reached excessively optimistic levels, signaling risk for a pullback. Credit indicators continue to not signal a catalyst, however with fully valued markets and excessive investor optimism, upside appears muted and downside risk is elevated....

The ratio of Net PP&E to Gross PP&E (property, plant, and equipment) is a useful metric to use to understand when companies have been “milking” their balance sheets or ramping up investment in the face of expected growth opportunities. When Net/Gross PP&E ratios dramatically rise (as they did in 2005-2007), it means that management teams are aggressively investing in their assets to drive growth. When Net/Gross PP&E levels fall, management teams are instead deferring maintenance capex and managing for higher free cash flows in the near term....