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

October 26, 2017

Market Phase Cycle™ Investing Strategy

Santa Claus is coming to town – someone should tell equity investors

The seasonal strength of the equity markets into Q4 and through the end of the year are a well-known phenomenon. This year, they are likely to benefit from a combination of overly cautious investor sentiment going into Q4, and continued building earnings growth trends.

While the equity market remains fully valued, requiring growth to power upside, corporations have been delivering robust earnings growth that justifies 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.

However, investor sentiment has dropped to relatively pessimistic levels considering the market conditions. Investors appear to have forgotten that Santa is coming to town, and the presents he has in tow look pretty special this year.

Investor sentiment has moderated

Short-term and medium-term sentiment indicators, including investor equity allocations and margin levels, have fallen to neutral levels. Investors are not positioned for a potential upside move.

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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