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

October 22, 2020

  • Growth and Sentiment Signal We’re at the High End of a Range Bound Market. Profitability is likely to recover quickly from the recession, and key indicators point to reason for optimism for longer-term growth. However, management sentiment indicators are shifting more negatively around growth, which could hold down valuations in the near-term. Fundamentals should bounce back rapidly, but growing management pessimism about growth may disappoint investors in Q3
  • The coronavirus pandemic has pushed the world into a short-term recession, but thanks to credit fundamentals, it’s likely not to be a protracted deep recession or long recovery. Favorable bank, corporate, and consumer credit fundamentals heading into this disruption still point to optimism for a strong recovery
  • Sentiment indicators are again excessively bullish. The recent rally has pushed investors to exuberant levels, they are not focused on near-term risks. Valuations are expensive, and continued earnings growth is needed to justify them. Valuations and sentiment likely cap near-term upside, though any drop due to valuations, growth, and sentiment signals is capped by a lack of credit overhangs