How to Position Your Portfolio to Weather a Potential Recession?

Inflation continues to concern both individuals and the market. The Federal Reserve has combated this with a substantial rate hike, aiming to control inflation and maintain a low unemployment rate. Despite these aggressive measures, the U.S. economy has proven resilient, showing no signs of an anticipated recession. The inversion degree between two-year and ten-year U.S. Treasury yields is traditionally an indicator of upcoming recessions, but it has not worked so far in this cycle. The absence of a recession, despite significant rate hikes, is due to several factors: a robust job market, the effects of government fiscal stimulus during the pandemic, and moderate consumer debt. However, given the persisting high inflation, the Federal Reserve’s inability to manage interest rates’ degree and speed effectively, and the inevitable cyclicality of economic decision-making, the U.S. may soon face a recession. To mitigate this, strategic adjustments to asset allocation might be preferred, reducing stock exposure and moderately increasing bond exposure. Read more on our blog

Account Types

Cash Account:  In a cash account, all transactions must be paid in full with available cash or investments; no credit is permitted. When using an existing investment position to finance a transaction, the investor must be able to sell it that same day in order for the necessary cash to become available.

Margin Account: In a margin account, investors can borrow up to 50% of the cost of securities they wish to purchase from their brokerage firm in a process referred to as buying on margin. Investors are charged interest on the account loan which accrues on a monthly basis, and the loan must be paid off when the securities are sold. The idea behind margin accounts is to use increased purchasing power to purchase securities that will increase in value faster than the loan interest. However, there’s also a greater potential for large losses when using credit. Margin accounts are thus much riskier than cash accounts and come with additional requirements for both the investor and the FINRA member firm.

Options Account: Broker-dealers are required to formally approve investors for options trading by having them complete an options agreement, which will assess the investor’s general investing knowledge as well as their knowledge of options, trading strategies, and the risks associated with options transactions. They may also need to provide information such as investment objectives, trading experience, and personal financial details. In addition to the options agreement, broker-dealers are required to furnish all potential options investors with certain disclosures. Once approved, the broker-dealer will decide which option trading level the investor qualifies for (typically one of five levels varying in risk).