Valens Market Phase Cycle Monitor & Corporate Credit Macro View for December 2018

Market Phase Cycle™ Investing Strategy

A deep bear market does not occur without credit risk – we do not see any

The basis for the Market Phase Cycle, and what 150+ years of market cycle research shows, is that credit market cycles drive economic cycles and equity market cycles. When access to credit is easy, economic cycles trend positively as do equity markets. When credit markets tighten, and credit destruction happens, equity markets and the economy react similarly.

This is not just the case in 2008 or 1929, this is the case for every single economic cycle in the last 150+ years in the US and globally. Credit cycles lead equity and economic cycles.

Without a crisis in the credit market, an equity market sell off does not turn into a bear market rout. Contrary to what headlines might want to tell investors, the data does not show any rout at all:

• Senior Loan Office Survey statistics still show credit easing
• C&I loan growth remains robustly positive
• CDS levels for high yield, cross over and investment grade corporate credit all remain at very low, safe levels, well below even 2015 levels, let alone 2008 levels
• C&I loan charge-offs continue to trend downward
• Corporate credit debt maturity headwalls are not material until 2021, meaning the risk of refinancing issues, causing a credit crunch is very low until that period
• Consumer balance sheets remain very healthy, with debt service obligations at historic lows relative to income

None of these datapoints point to an imminent risk of credit collapse. And this is before looking at the fact that corporate profitability is strong, valuations remain low, management teams remain confident in their outlook, and investor sentiment is at very negative levels, all pointing towards reason for optimism.

This sell-off continues to be an opportunity to buy the dips, not run for the hills.