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With the chances of a recession increasing, Morgan Stanley Smith Barney has dialed back on risk assets in its portfolio, underweighting global equities, commodities and REITs, and boosting allocations to safe havens, such as cash, bonds and managed futures, the firm said during a press briefing Wednesday morning.

“Now’s a good time to play it a little bit safer,” said Charles Reinhard, deputy chief investment officer at MSSB.

We’re in a cyclical (short-term) bear/bull cycle with bearish characteristics, said David Darst, chief investment strategist. One reason for this is that corporations and households have been deleveraging their balance sheets, or reducing the size of their debt, and hoarding liquidity, he said. It’s also due to a dysfunctional Congress, which has been struggling to resolve a number of issues, such as U.S. debt and the deficit. “This is not the time to be fighting with one another,” he said.

Darst also said we’re in a secular sideways market. A year ago, the firm said we were in a multi-year bull market that started in March 2009 and could last two years or more. Now Darst says we won’t reach another bull market until valuations get really cheap and we see structural reform, as opposed to more monetary easing, which he calls “financial steroids.” To achieve this structural reform, the country’s leaders need to make it more attractive for baby boomers to invest and build up their income.

“We are in a crisis of confidence,” Darst said. “This is a rough patch of resetting.”

MSSB recently increased its allocation to managed futures from 4 percent last year to 7 percent this year, because, says Darst, they sometimes perform well in down equity markets. From October 2007 to January 2009 when the S&P 500 was down 45 percent, the CISDM CTA Index was up 18 percent, Darst said. Managed futures are a bit like having chains on your tires, he added. You won’t go fast, but if the roads get slick, they will protect you.

The firm changed its bond allocation from underweight to market weight, and expects the fluctuation in the Treasury market to continue for a while. MSSB is overweight investment grade corporate credit because it sees this as an opportunistic, defensive move. “The headline risk is alive and well,” and it’s not going away any time soon, said Kevin Flanagan, chief fixed income strategist.