Market Phase Cycle™ Investing Strategy
With many catalysts, and all conflicting, what to do? Wait.
Traditional multiples are at elevated levels and adjusted metrics point to a fully valued market. But long-term investor leverage metrics are low, implying potential for incremental investment in an environment with limited alternatives.
Correlations are spiking, signaling rising investor pessimism and volatility. But active investor sentiment indicators are bullish and short interest metrics are at low levels, signaling investors view the market as safe.
Management teams are not confident about investing in growth, and capex and M&A spending has also dried up, spelling limited potential for investment. But Net/Gross PP&E ratios are plumbing historic lows, meaning management teams are likely to need to invest in maintenance capex soon.
The senior lenders survey and loan charge-offs are rising, signaling concerns about bank balance sheets and availability of credit. But lending growth remains robust, corporate management teams have multi-year runways before worrying about refinancing risk, and other credit metrics, including iCDS and CDS, point to continued safety in the credit markets.
There are lots of different signals in the markets currently, many of them contradictory. In times like this, having a consistent framework for understanding the market is essential.
The Market Phase Cycle analysis focuses on a holistic view of the metrics impacting the market. Right now, based on these conflicting indicators, the best course of action isn’t to expect a plunge in the market in the near-term credit risk doesn’t justify it. It also doesn’t predict a near-term material rally – valuations and growth don’t justify it. Instead, near-term volatility is likely to persist, and the best course is to invest tactically, not bet big in a market where no big directional bet is warranted.