Valens Research US Market Phase Cycle - August 2019
A recession cannot occur without a negative credit event and credit destruction. The corporate credit outlook and recent Fed actions signal there is no near-term risk of a credit event. Without a negative credit cycle, earnings growth and stock price appreciation can continue. The yield curve inversion earlier in 2019 and corporate credit headwalls looming in 2021 could cause spell risks for the economy and market entering 2020 and heading to 2021. However, the recent declines in corporate cost to borrow and the Fed cutting rates significantly increase the probability of an improved refinancing environment; this removes the potential overhang to the market.Corporate earnings growth, the core driver of equity market appreciation, may be slower going forward, which could limit appreciation. Corporate profitability has risen each year since 2016 when as-reported accounting distortions are removed. Uniform ROA is forecast to maintain all-time high levels of 12%+ in 2019 and 2020. However, Uniform Earnings are forecast to grow 4% a year over the next two years, significantly below 2016-2018 levels. This is likely driven by more subdued plans for corporate investment, with capacity utilization ratios weaker, and management teams less willing to invest in the current trade and macro climate. This could mean a range-bound market in the near-term.
Sentiment indicators have yet to provide an all-clear for near-term volatility. Equity sentiment indicators had flashed a warning sign in mid-July, ahead of the early August sell-off in the market. The sell-off shifted those sentiment indicators off overbought levels, but they are only now at average levels and have not reached oversold levels. Generally capitulation needs to occur before sustained buying resumes.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
The integrity of Valens Research is founded in our disciplined processes and analytics. No “star” analysts. No corporate advisory relationships. No-nonsense opinions and recommendations.
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