Markets’ rocky start to the year owes more than a little to the expectation that the Federal Reserve might hike rates over the coming months. By the end of the year, it might also shrink its vast balance sheet.
Given what happened to assets the last time the Fed engaged in monetary tightening, one can appreciate why investors are jittery. As this chart from the excellent Jim Reid of Deutsche Bank highlights, the last period of Fed tightening, in 2017/18, was followed by the highest ever proportion of asset classes recording negative total returns. Eeek:
As Reid puts it:
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