How to stress-test portfolios in an atypical market

I’ve seen mature bull markets before, but this one feels different — like a late cycle without the usual warnings. 

For over two years, short-term Treasury yields sat above long-term ones, a deeply inverted curve that warned of trouble ahead. Normally, when the Treasury yield curve steepens after a long inversion, credit spreads widen, volatility jumps and downturns tend to follow. 

But this time, credit spreads remain tight, and the VIX, the leading indicator of the broad U.S. stock market, is hovering in the mid-teens. That’s calm pricing. Add in back-and-forth tariff policies, mixed messages from the Fed and a labor market that’s starting to cool, and recession warnings are becoming louder.

In response, we’re seeing advisors move client cash into money market funds to maintain liquidity and safely capture higher short-term yields. According to the Investment Company Institute, total money market fund assets increased by $52.37 billion to $7.26 trillion for the week ended Sept. 3, up from about $7.03 trillion in March. (Assets briefly peaked near $7.24 trillion late last year, showing that flows fluctuate with rate expectations but remain historically elevated.)

We’re also seeing advisors use short-term Treasuries as ultra-safe cash equivalents while rotating into utilities to add reliable, income-oriented returns that can help cushion portfolios if bond yields rise or volatility increases. 

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Safety first?

These moves have benefited from the higher-rate climate that’s been in place since the Fed began its hikes in 2022, keeping short-term yields elevated through 2023 and 2024. But the same backdrop can turn long-term bonds into a drag if rates stay higher for longer or the Fed cuts more slowly than markets expect, even as recession pressures build. 

Amid the current market uncertainty, clients are asking whether the market gains they’ve been seeing mean the worst of inflation spikes, Fed hikes and market volatility are behind us, even as headlines warn of a looming recession. 

In this uncertain environment, emotions often outweigh strategy, leading clients to walk away from long-term financial plans and chase recent winners in more volatile sectors like energy or consumer discretionary, or reach for yield in long-duration bonds. Both moves can be risky, and it falls to advisors to explain why they may backfire when clients are expecting safety or steady returns. 

READ MORE: As stock market flirts with record highs, why are advisors nervous?

It’s easy to assume that the real skill in late-cycle markets is to find a list of “safe” holdings. In fact, it’s about knowing which ones will still deliver in a downturn. For planners, the practical approach in such an environment is to organize portfolios around clear roles such as income, liquidity, defensive positioning and resilience — and then to review whether each holding justifies its place.

Framing portfolios around those core roles will help advisors build a steady base that keeps clients invested through market pullbacks. That’s why it’s essential to make sure each holding will continue to deliver on each of these counts (income, liquidity, defensive positioning and resilience) in case of a downturn. 

Stress-test core investments across a range of scenarios, for example: 

• a hypothetical 10% earnings drop, 
• a 50 basis point rise in the 10-year Treasury yield
• or a slower-than-expected Fed cutting path. 

If something no longer fits, it’s the advisor’s job to guide clients out of so-called safe havens and into assets that better serve today’s prerecessionary climate. When it comes to income, that often means emphasizing companies with durable cash flows and reliable dividends typically found in sectors like utilities and health care that tend to maintain payouts even in downturns, giving clients a steadier income stream.

Beyond the core

For liquidity and defensive positioning, I recommend planners lean on short-term vehicles that keep capital accessible while limiting exposure to interest-rate swings. To add resilience, broad-sector exposure in health care and consumer staples can help smooth volatility, while high-quality corporate bonds provide income with less credit risk.

Beyond those core roles, planners may look at diversification via alternatives such as real estate. REITs provide an accessible way to add real estate exposure without direct ownership, but they require more caution than core equity or bond holdings. Their sensitivity to interest-rate jumps means that while mortgage REITs have gained this year, equity REITs have lagged.

READ MORE: As access to alts expands, here’s why some advisors remain cautious

Late-cycle markets aren’t static, and portfolios shouldn’t be either. Roles that make perfect sense today can lose their advantage if the Fed’s path changes, earnings forecasts weaken, or policy shocks hit a sensitive sector. That’s why planners need a process with flexibility at its core. 

Just as important is keeping clients anchored. In news cycles that trade on fear and relief in equal measure, an advisor’s ability to frame moves as part of a larger strategy will keep them invested through the noise. 

The bottom line: Resilience comes from matching every asset to a role, and rotating them when that role no longer fits.