Greg Khojikian is the founder and CEO of GFF Brokers. He has over 20 years of experience in the Futures and Forex industry.
If there’s one thing I learned from working 20+ years in the commodity futures industry, it’s that no person, no matter how knowledgeable, can definitively predict what’s going to happen in the markets or economy. There’s no crystal ball in the world of finance.
This makes anticipating a recession a tricky prospect. This kind of economic shift subjects a business to a period of potentially low growth, and it often necessitates changes in business operations and policy. In other words, a recession’s impact can be anywhere from difficult to potentially devastating. So, proper preparation is a critical responsibility for every business owner.
How Do You Forecast A Recession?
Like many financial developments, recessions—particularly their timing and depth—are difficult to forecast or pinpoint. You can see the storm clouds ahead, but you can’t always get a sense of the shape of the recession—whether it’s going to be short, long, light or significant—until you’re deep into it.
If a recession were simply two consecutive quarters of negative GDP, it would be easy to identify its relative starting point. But even that’s debatable according to official government sources. While we can consult financial experts, that might not yield much practical information.
Still, as the saying goes, “It’s better to mistake a stone for a bear than a bear for a stone.” When it looks like there are uncertain times ahead, try keeping these tips in mind.
1. Understand That Recessions Are Learning Opportunities
I have firsthand experience with learning from recessionary periods. My colleagues and I were working in this industry during the 2008 financial crisis. We tackled the challenges of a recession that, for some of us, was our first experience as working professionals.
We discovered that it helps to know which clients tend to fare well during major economic downturns. We also measured the impact of marketing in contrast to sales, and boosting or downsizing different operations. As we enter a new recession, fighting the last recessionary battle gave us enough experience to face this new one head-on.
2. Prepare Clients For Volatility
In the world of futures trading, where instruments are highly leveraged, risk management is placed at the forefront of everything we do. The risks our clients take constitute a significant risk for our company as well. In a recessionary market environment, where volatility can significantly increase, we have to pay special attention to clients who may be taking positions on short-term movements. This is because many of them are likely to enter the wrong side of the market or the right side at the wrong time.
3. Remember That Cash Is King
Building your company’s cash reserve for operational expenses in the months leading to a potential recession is just smart business. There’s one big caveat, though. Money sitting in a bank, especially during periods of high inflation, can be an eroding resource. So, be sure to do what you can—if anything—to mitigate this. Either way, an adequate cash reserve is better than no reserve at all.
4. Strengthen Your Team
When a ship sails through rough seas, morale is everything. As a business leader, you may see the dark clouds ahead, but you can’t expect everyone on your team to be monitoring the horizon in the same capacity. Let them know what you see. More importantly, make sure everyone’s in an operational role that emphasizes their natural strengths. Of course, there’s no perfect match between position and talent. So, be sure to provide plenty of individualized support for those who may be struggling in certain areas.
5. Communicate With Your Clients
Keeping close communications with clients in futures trading is already essential, as it helps ensure their safety in an inherently risky environment. But being in touch is especially critical during periods of extreme volatility. After all, not every client may be aware of the implications of a recessionary environment, like changes in margin requirements, the impact on price swings in particular markets, etc. In futures trading, it’s important to communicate with your clients on a regular basis—real one-on-one service. This helps your company mitigate risk, as we share our clients’ risks as well, and it provides an opportunity for businesses to strengthen their relationships with clients.
6. Monitor Economic Reports
A big-picture view of the economy comes by way of a jigsaw puzzle; you have to piece it together yourself. By keeping a finger on the pulse of economic drivers, business leaders can forecast what’s up ahead and prepare accordingly. Following every major or market-moving report helps, from the weekly jobs report all the way up to the quarterly GDP.
Every potential recession brings both burden and opportunity. It’s a chance for you to test your business strategies and tweak them to see how resilience may be converted into operational strength. And remember that recessions are cyclical, meaning you’ll eventually face a number of them in the course of your career and your company’s lifetime.