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

August 3, 2017

Market Phase Cycle™ Investing Strategy

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.

Positive management sentiment is very bullish, but markets have already reacted

The Management Growth Confidence index continued to show positive signals in November, a bullish sign for growth resuming in 2017. However, all short-term and medium-term sentiment indicators, including investor equity allocation, short interest, and correlation have extended to very bullish levels, limiting catalysts for further upside.

Current valuations show expectations for ROA’ recovery, but continued subdued Asset’ growth

Market expectations currently are for ROA’ to return to a positive trend in 2017 after having declined in 2015 & 2016, but for Asset’ growth to remain subdued. Considering strong management execution and improvements in areas of headwinds like Energy, expectations for a recovery in ROA’ appear reasonable. If Asset’ growth remains as subdued as it has been, this would mean that current market valuations are fair. But if management confidence and policy changes result in growth accelerating, there is reason to expect upside.

Credit risk is not showing any near-term warning signs to disrupt the potential for growth

None of Valens’ proprietary credit metrics signal risk of a credit crunch, including near-term debt maturity analysis, iCDS and CDS analysis, and other fundamental metrics, limiting downside risk for the market. Also, while credit quality, as highlighted by delinquencies, is rising, bank lending standards in Q3 2016 eased for the first time in five quarters, a potential positive catalyst for lending growth.

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