June 21, 2018

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


Market Phase Cycle™ Investing Strategy

Bullish sentiment and headline risk creates buying opportunities – use them


Equity markets rallied 6% from early-May to mid-June. Concerns about inflation, interest rates, geopolitical problems, and trade issues dropped to the background in the face of an earnings season that produced strong earnings and management confidence about corporate outlooks.

That rally, justified by fundamentals, moved investor sentiment from levels that had been overly conservative the last several months to levels that appear rather extended in the near-term.

This is occurring at a time when geopolitical commentary is just starting to heat up. US tariff discussions, European political issues, and geopolitical volatility in Asia all remain headline risks. With investors having rapidly moved to a more bullish position, this could create volatility in the near-term.

However, as recent Market Phase Cycle reports have highlighted, if there is volatility, it is a buying opportunity, in the midst of a strong second-stage bull market. Investors have a lot of reasons to see through the headlines:

  • Corporate fundamentals remain strong. Earnings growth is robust and adjusted-ROA are at historic peaks. At the same time, valuations are relatively muted.
  • Corporate credit risk remains low, with CDS and iCDS levels at very healthy ranges. Debt maturity headwalls are several years in the future, limiting refinancing risk. Also, lending standards remain loose and easing, limiting risk for corporations accessing credit. Bear markets do not happen without a credit crisis
  • Investment is primed to accelerate, boosting earnings growth. Management teams continue to grow more confident about their outlook. Old assets and rising capacity utilization signal a required capex cycle just as growth is accelerating.
  • Ample room for cash usage to buy back shares, fuel growth, and otherwise deploy and return capital with improving profitability and the recent tax break
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