Stocks fell slightly last week. US retail sales were weaker than expected, but the labour market showed resilience.
These data are typical of an economy in the late cycle, the last phase of the business cycle before a recession. Consumers have excess savings from the pandemic, which they are spending. But the savings will run out in Q3-Q4 this year.
Our base scenario is that the market continues to rally over the next 1-2 months because 1) investors are rather pessimistic, 2) this pessimism is out of line with the latest news flow, which indicates that a recession will be avoided, and 3) the near-term liquidity picture is supportive.
Looking beyond the next 1-2 months, however, we believe the economy will fall into recession, and that will lead to another bout of market weakness.
The plan therefore is to look for opportunities to reduce the risk level of the portfolio, should the rally continue.
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