Valens Market Phase Cycle Monitor & Corporate Credit Macro View for November 2017

December 3, 2017

Market Phase Cycle™ Investing Strategy

Can Santa Claus Visit Twice In 4 Months – Investors Are Betting Against It

Equity market expectations are currently not aggressive – pricing in continued modest growth with steady ROA’ improvement. If corporations continue to deliver the strong adjusted earnings growth they’ve delivered this year, there is substantial fundamental upside going forward.

Investor sentiment has fallen from overly bullish levels to very conservative levels in the past 3 months. Investors are positioned for a pullback, making it less likely to happen.

As highlighted in prior letters, the markets tend to be strong into year end. Fundamentals and valuations currently justify upside, and investors are not positioned for that upside, even after a strong run this year. Santa Claus gave investors an early gift with a 4% run since early September, but the real Christmas present appears to still be on the way.

Investor sentiment has grown overly conservative

Short-term and medium-term sentiment indicators, including investor equity allocations and margin levels, have moved to conservative levels. Investors are not positioned for an upside move, that could lead upside with fundamentals continuing to trend positively.

Fundamental indicators continue to point to earnings growth and fundamental growth trends that drive a momentum market

Strong management execution is driving forecasts for earnings growth in 2017 and beyond. Management is confident about investing in growth and this is leading to increased investment. The market is pricing in a rebound in ROA’ but continued muted Asset’ growth. If companies continue to deliver earnings growth, it will drive upside.

Credit risk is limited in the near-term

There are currently no near-term areas for concern in the credit markets. Access to credit, based on lending metrics, is positive, and corporate balance sheets and debt maturity schedules remain healthy. Absent credit issues, any sell-off cannot turn into a bear-market.

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