Monthly Market Perspective: July 2023

A Surprisingly Resilient U.S. Economy So Far, but Recession Risk Still High

By James M. Walden, CFA

The U.S. economy has been surprisingly resilient so far in 2023. In fact, the Commerce Department revised first-quarter gross domestic product (GDP) growth up to a 2% annual rate from its initial estimate of 1.3%. Strong consumer spending, aided in part by a tight labor market that continues to add jobs, was a big contributor to the new number.

In turn, financial markets enjoyed a strong first half of the year. Including dividends, the S&P 500 gained almost 17%. A big driver is simply that things haven’t been as bad as some feared. The market has also been buoyed by the progress on bringing down inflation and hopes the Fed will soon end its campaign of interest-rate hikes, if it doesn’t outright pivot to rate cuts. Combined, lower inflation and hopes for interest-rate relief have boosted investor sentiment. Further, the hype around artificial intelligence has driven gains for mega-tech stocks, which have accounted for the lion’s share of first-half returns.

All that is good and well. However, in investing, it’s more important to focus on where we’re headed, not where we’ve been. In our opinion, the risks of a recession in the near term remain high.

Every business cycle is unique. But certain conditions, with varying lead times, have tended to result in recessions,

  • Annual inflation of at least 5%
  • Fed tightening and an increase in market interest rates
  • An inverted yield curve
  • A significant decline in consumer confidence
  • A meaningful contraction in new manufacturing orders
  • An increase in initial claims for unemployment insurance
  • A significant tightening of bank lending standards
  • A spike in the Fed’s Probability Model of U.S. Recession (The following exhibit shows the latest reading, which sits
  • at its highest probability reading since the early 1980s.)

All of these are time-tested precursors to historical recessions. And all of them are flashing red right now.

Source: Federal Reserve Bank of New York, Clayton Wealth Partners. Updated July 7, 2023.

Historically, recessions have coincided with a decline in corporate profits. And a decline in earnings would weigh on the stock market.
We’re happy to participate in the year’s strong gains so far. But we’re still mindful of the risks that remain for the economy and financial markets.


  • The Fed is making progress toward reducing inflation
  • Significant pent-up consumer demand
  • The services sector of the U.S. has remained strong
  • The most attractive yields for fixed income and cash in years


  • Global inflation remains too high
  • Global central bank tightening
  • Slowing global economic growth with recession pressures mounting
  • Deterioration in leading indicators of unemployment, such as a lower number of job openings and increasing layoffs and initial jobless claims
  • Delinquency rates on consumer loans are rising
  • Russia-Ukraine war and other geopolitical concerns
  • China’s post-Covid economic rebound has lost momentum, with deflation fears growing

James Walden, CFA

As a partner and the firm’s Chief Investment Officer, James Walden strives to maximize our clients’ long-term, risk-adjusted portfolio returns. This includes determining strategic and tactical asset allocations, as well as specific investment analysis and prudent rebalancing. Jim is also a partner and management team member. His expertise includes advanced investment research and valuation, and he is passionate about his role in helping clients reach and exceed their financial goals.