Valens Market Phase Cycle Monitor & Corporate Credit Macro View for August 2020

• The Market Continues to Climb the Wall of Worry – With Limited Long-term Worries. Earnings growth and investment are likely to recover quickly from the recession, due to a need to invest, and management teams’ growing confidence and lack of concern about structural issues. Fundamentals should bounce back rapidly, but after the recent rally, equity markets are pricing in a well-executed recovery, capping upside
• The coronavirus pandemic has pushed the world into a short-term recession, but thanks to credit fundamentals, it’s likely not to be a protracted deep recession or long recovery. Favorable bank, corporate, and consumer credit fundamentals heading into this disruption still point to optimism for a strong recovery
• Sentiment indicators have become excessively positive. After the impressive rally since March, investors have become overly reward-focused, and are not prepared for any negative news in the near term. Q2 earnings have not offered a trigger for this to occur, while growing uncertainty from Washington could offer a trigger. Valuations are expensive, though continued earnings growth justifies them, near term sentiment-driven downside may be probable, though the drop is capped by a lack of credit overhangs