Both equities and fixed income have been punished in 2022 amid fears over the Federal Reserve hiking interest rates to tame the highest inflation in decades.
While the Fed was “slow to respond to the inflation early on,” the central bank eventually pivoted this year with “one of the most aggressive periods of tightening that we’ve seen in history,” Shah said. The Fed raised its benchmark rate from zero to around 4% in a “very short” period of time this year, he said, while the accompanying tightening of financial conditions has been prompting concerns that a U.S. recession may be coming.
While the Fed’s tightening of monetary policy is going to lead to an economic slowdown, a recession is still up for debate, in his view. Trends this year such as higher interest rates, a stronger dollar, and lower prices for risk assets have made it “very easy” for momentum strategies to play out well, according to Shah. But markets are now facing a stretch where the Fed may begin to slow its pace of rate hikes, so those trends won’t be as “apparent and easy to trade,” he cautioned.