October 19, 2017

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


Market Phase Cycle™ Investing Strategy

When fundamentals, sentiment and credit point the same way, don’t overthink it


As highlighted in the September letter, equity markets tend to have strength in Q4. Even after a month where the market continued to move higher, investor sentiment remains relatively muted. This, combined with continued building earnings growth trends, offers market tail winds.

While markets are expecting growth, corporations have been delivering the robust earnings that justify the market trending higher. Management teams continue to grow more confident about growth. Credit markets also offer no clear catalyst for equity downside for the next 2+ years.

Even with fully valued markets, positive fundamental momentum, neutral investor sentiment, and the lack of risk for a negative credit event points to reasons to continue to expect fundamental tailwinds.

Investor sentiment remains neutral

Short-term and medium-term sentiment indicators, including investor equity allocations and margin levels, remain at neutral levels. Investors are not positioned for a potential upside move or under-focused on risks that could lead to a surprise down move for fundamental reasons.

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’ and Asset’ growth, but if companies continue to deliver on earnings growth, it will drive equity 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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