January 17, 2019

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


Market Phase Cycle™ Investing Strategy

A RECESSION IS COMING … in 1.5-2 years if trends do not change before then

The yield curve has flattened dramatically in the past quarter. CDS and bond yields are trending negatively. China and Europe appear to have growth issues, and the Fed may be too hawkish. Cash levels relative to debt maturities are at levels not seen since 2007 and companies will have debt maturity headwalls in 2021 that could be a concern. A recession is coming! Run for the hills!

Datapoints like these helped contribute to December’s sell-off. Even with the rally thus far in January, they have been talking points for those concerned about the market. On their face, they certainly give investors reason for pause.

However, so much about the issues highlighted above demands incremental context which those headlines do not provide. Context, which gives reason to believe those worries are a wall the market is likely to climb in 2019, not quicksand the market is likely to sink into. Context such as…

Yield curve inversions tend to lead a recession by 18 months. HY CDS and bond yields have risen, but remain below levels seen in 2014-2015. Cash levels may be low relative to near-term debt maturities, however, cash flow alone exceeds all corporate obligations for the next 2+ years, ahead of that 2021 headwall.

There may be reasons to be concerned about how the economy and market could trend in late 2020 and into 2021 based on the above datapoints. However, that data could change significantly in the next two years. Investing for a potential negative event that may happen in the intermediate future is bad process, especially when positive signals are occurring right now. Positive signals around corporate profitability, valuations, growth, and near-term lending trends, that give concrete reasons to expect earnings growth in the coming quarters; earnings growth that will lead to equity appreciation, and a strong market in 2019.