Monthly Market Perspective: June 2023

Stocks Rally in the Face of High Recession Risk

By James M. Walden, CFA

Even with the recent strength of the S&P 500, the U.S. economy continues to face a high risk of recession in the near term.

Certain shared conditions have often been found in periods leading to past recessions: annual inflation higher than 5%, Fed tightening, an inverted yield curve, housing weakness, and tougher bank-lending standards, to name a few. All these criteria have been met in this current cycle, putting us on alert.

Employment—specifically nonfarm payrolls—is one important area that generally moves in lockstep with the broader economy. And those payroll numbers have been resilient so far.

But certain employment data trends tend to turn before trends in the headline payrolls number or unemployment rate. These include average weekly hours worked, temporary help services, and weekly initial claims for unemployment insurance. These series have all begun to deteriorate. (See the following exhibit for the trend for initial jobless claims for the past year, which is now increasing.)

Exhibit: 4-Week Moving Average of Initial Claims

 

Source: U.S. Employment and Training Administration, 4-Week Moving Average of Initial Claims [IC4WSA], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/IC4WSA, June 13, 2023, Clayton Wealth Partners.

It’s possible that we could still avoid recession—the labor market could prove to be strong enough to absorb those deteriorating early trends, for example. But combined with today’s other time-tested pre-recession conditions, that leads to the infamous argument that “this time is different.”

Bullish

  • Significant pent-up consumer demand
  • Reasonable equity valuations
  • The most attractive yields for fixed income in years
  • The Fed’s progress toward reducing inflation

Bearish

  • Slowing global economic growth with recession pressures mounting
  • Inverted yield curve
  • 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
  • Wall Street is cutting estimates of corporate profits
  • Global inflation remains too high
  • Ongoing deterioration in housing
  • Global central banks tightening
  • Russia-Ukraine war and other geopolitical concerns

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.