Valens Research US Market Phase Cycle Monitor & Corporate Credit Macro View - January 2018
In late 2016 into early 2017, we repeatedly highlighted that fundamentals appeared to be accelerating favorably, and this would be a tailwind for markets in the coming year. As we enter 2018, we see many factors pointing similarly for the markets. Management teams continue to be ramping up investment, and corporate earnings are benefiting from the corporate tax cut. Valuations remain reasonable. Also, credit risk remains muted with strong balance sheets and income statements, and limited debt maturity headwalls. These all warrant continued equity upside in 2018. In early 2017, based on the Market Phase Cycle, there were limited concerns for investors. If we had to watch for risks in 2018, later in the year there may be questions about inflation and an inverted yield curve. Long-term, these are signals that have proven to help identify risks for the market. However, they do not mean impending near-term equity market doom in 2018. It continues to be a buy-the-dip market environment in the upcoming year. As stated above: - Bear market cycles do not happen without a credit crisis, and UAFRS-based fundamental credit risk is muted until 2020-2021 – which lines up with the 18+ months lead that an inverted yield curve generally gives for a recession - UAFRS analysis shows market valuations are not aggressive and earnings growth justifies upside – it is this strong earnings growth that is driving inflation - Investor sentiment remains muted, investors remain risk-focused, limiting the potential for significant corrections, and facilitating a buy-the-dip environment
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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