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Experts Weigh in on Best Techniques For Protecting Your Portfolios with a Recession on the Horizon

Anxious about an impending stock market sell-off, investors are looking to recession-proof their portfolios before the next downturn. A shift is happening in the marketplace, leading retail investors to rebalance and diversify their assets to ensure low volatility and continued growth.

Markets are roiling again as equity prices dive further, erasing more of 2023’s historic gains.

The recession boogeyman is back. Markets retreat as fears of an entrenched “higher for longer” monetary regime saps earlier confidence in the “soft-landing” scenario.

Wall Street bears are roaring again after a historic spike in bond yields and JPMorgan CEO Jamie Dimon’s dire warning of 7% interest rates.

The benchmark S&P 500 has lost almost 350 points from its high point of 4,594 points at the end of July.

Spooked institutional investors seek the shelter of cash accounts, made all the more comfortable by unbeatable yields. By early August, institutional cash on the sidelines climbed to a year-to-date high of $3.5 trillion.

In the previous market system, passive investing dominated, especially with diversified portfolios of low-cost indexed funds. Yet, with the return of higher bond yields and the rising popularity of fixed-income investing, it’s unclear whether that strategy is still as effective.

Delving deeper into the current market dynamics with expert guidance can help clarify what this means for an investing plan.

Jeepers Creepers 

The U.S. market’s Fear & Greed Index is now at “Extreme Fear” – a dramatic reversal from where it was in summer amid the heady days of the bull run. Although an imperfect metric, the index has reliably indicated sentiment swings amid major past events, such as the 2008 global financial crisis, the 2012 stock rally, and the COVID-19 market crash.

Doug Greenberg, President at Pacific Northwest Advisory, likens the current Extreme Fear reading to an investor’s “pulse racing in a haunted house of economic uncertainties.” Greenberg says, “It could be a temporary shiver or a prelude to a deep freeze.”

“Market sentiment, like a powerful force of nature, can stay in the ‘Extreme Fear’ zone for a while, but eventually, it will find balance,” adds Jorey Bernstein, CEO of Bernstein Investment Consultants. “Whether this leads to a crash or a temporary correction depends on numerous factors, including economic data and central bank actions.”

The Federal Reserve’s next meeting is scheduled for October 31- November 1, at which point it will announce any updated monetary policy decisions.

“There should be no question now that the Fed should be done,” Wharton School’s Professor Jeremy Siegel told CNBC this week.

“Right now, we have S&P 500 selling for 17 times next year’s earnings; to me, that’s a very good price. Ex-tech we’re selling at 14 times next year’s earnings… A lot of these high-rates are already discounted in the price of stocks.”

More Pain, More Gains?

These high rates hint at potentially outsized gains. This sell-off could be a ‘buy the dip’ opportunity for confident investors as part of their long-term growth strategy.

In trying to make sense of the market retreat, Oliver Pursche of Westport-based Wealthspire Advisors told Reuters this week investors have realized “the idea that the Fed is going to cut rates any time soon is fictional” and that the market could be technically oversold at this point.

“Whether the market is sitting on thin ice or just traversing a temporary frosty patch is the million-dollar question,” agrees Greenberg. “The oversold notion might be a hopeful mirage in a desert of uncertainty… or a solid platform from which a market rebound could leap.”

“The market may be approaching oversold territory, but predicting how much ground it has left to lose is akin to trying to forecast a storm’s exact path,” adds Bernstein.

Recessionary Reality

Predictions of a recession have been constant ever since the pandemic struck in 2020, yet after almost three years of waiting, a recession might finally be closer to arriving.

Deutsche Bank last month identified the four most determinative macroeconomic trigger events for recessions by analyzing 34 U.S. previous recessions dating back to 1854. Those triggers are rapidly rising short-end interest rates, surging inflation, inversions of the yield curve, and oil price shocks – all four are happening now.

The latest CNBC poll of roughly 300 money managers reveals that 64% believe the U.S. economy will enter a recession by mid-next year or later.

The signs point to a recession coming around the corner – but can the average American ready their portfolio in time for the rocky road ahead?

“When faced with the looming possibility of a recession, diversification is like building a sturdy shelter,” says Bernstein. “Consider a mix of assets, including gold and cash, to weather the storm. But don’t forget to consult with a financial advisor to tailor your strategy to your specific situation.”

With the digital economy, there are now numerous ways to invest in gold, either through gold price ETFs, gold jewelry, or gold certificates. Even physical objects are more accessible. Gold bars are selling like hotcakes on Costco’s website.

Unlike most products from the outlet, Costco’s 1-ounce gold bars do not come at a discount, selling above the market price for an ounce of gold, which is currently at around $1,820. There’s no bulk buying allowed either, as Costco limits members to two bars per person. Yet, that hasn’t stopped members from snapping up the physical store of value. The bars are “typically gone within a few hours” of listing on the company’s site.

The gold market is showing a lot of momentum, with the price of an ounce of gold expected to steadily rise over the next few years.

Although recessions often trigger a pivot toward this timeless precious metal, purchasing equities during an economic downturn may also be a golden opportunity.

As veteran investor Warren Buffet said, “Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold. When downpours of that sort occur, it’s imperative that we rush outdoors carrying washtubs, not teaspoons.”

Investors may fear buying plummeting equities – as the adage goes – don’t try to catch a falling knife. Yet over the long term, if the market regenerates, as it historically has, these stocks start to shine.

With so many data points and conflicting media messaging, it’s hard to see the forest for the trees. However, by researching stock picks and seeking professional advice from financial planners, investors can better prepare themselves for whatever may come in the markets and have confidence in their money moves.

Josh Dudick

Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.

Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.

Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.

Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.