Valens Market Phase Cycle Monitor & Corporate Credit Macro View for February 2019

February 22, 2019

Market Phase Cycle™ Investing Strategy

Bull markets die on euphoria, no one looks euphoric for this market

Bull Markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. 
– John Templeton

John Templeton was likely the first, and unsurprisingly one of the best, at summarizing what really drives market cycles. It is likely that Templeton would look at today’s market and not yet see the euphoria he referenced in the above quote.

He would not see euphoria from analysts. Analysts are forecasting as-reported EPS growth to slow from 26% last year to 11.3% this year. Certainly management teams are not yet showing euphoria in terms of interest in investing in their companies, with M&A spending almost $1tn lower in 2018 than at its 2015 peak. Nor would he see investors showing euphoria. As-reported P/E may look elevated at first glance at 19.7x, but this is slightly below average valuations for the current low-inflation, low-tax environment. For each of these metrics, UAFRS metrics tell similar stories.

This is not a young bull market. But markets do not die of old age, there needs to be a catalyst. Credit issues are generally that catalyst. But credit spreads and credit fundamentals do not point to concerns in the next year, especially with high yield CDS at low 200bps levels, and investment grade CDS still at sub 50bps. Some credit signals may point to potential concerns 2 years down the road, but there are no catalysts to take us to euphoria and turn it into despair until those catalysts become more real.

The market continues to climb a wall of worry. And that is good for investors, because that worry tells us we are not yet at the euphoric stage. Because of that, the Market Phase Cycle points to reasons to continue being optimistic for equity market appreciation, and we continue to see compelling stock ideas to make investors money in the current market environment.

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