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

• There are signs the U.S. recovery could be quick, but markets are already expecting it. 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 that does not mean a protracted deep recession or long recovery thanks to credit fundamentals. 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. Investors should remain patient as Q2 earnings in July are likely to offer reason for investors to be reminded of risks to the recovery. With valuations capping upside but elevated headline risk, near-term market downside may be probable, though the drop is capped by a lack of credit overhangs