How will the Fed handle its upcoming rate hike cycle, and can it do so without further impacting markets?

1. FED ROULETTE
27 JAN 2022

2. WAR ROOM
Idea Generation
Macro Coaching
Scenario Updates
HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS
Fed Underwrites Economy
Climate Disasters
Real Estate “Post” Covid
COVID 2.0

3. MARKET THEMES
Worst Jan in
Nasdaq history
death of
WFH darlings
Crude at
8-year highs
Intraday swings not
seen since Oct 2008

4. sources: HiddenLevers, MarketWatch, BEA
ECON PULSE CHECK
TRAVEL + HOSPITALITY UNEMPLOYMENT
Labor Force
Participation
Increasing
Real GDP % change
from preceding Qtr
Housing Starts
10y Trend Intact
Q3
2020
Weekly Jobless
Claims Slight
Uptick
Q4
2021
2%

5. INFLATION PULSE CHECK
Core CPI rising increasingly fast
sources: HiddenLevers, FRED, FRED
Real GDP Growth
• Real GDP is almost back to 2% trendline
growth from pre pandemic highs
• Core CPI and Real GDP growth are both 3.5%
above target
• CPI may remain elevated as long as GDP
growth is artificially inflated via pandemic era
stimulus (over in 2022)
2% Trendline
Real GDP Growth percentage change from year ago
2%

6. SCENARIO PULSE CHECK
NASDAQ MOON SHOTS – 600 IPOs in 2021, double 1999
COVID ENDGAME – Fed chatter louder than earnings

7. SCENARIO UPDATE JAN RATES INSANITY
DECEMBER HAWKISH PIVOT MARKET OVERTHINKING QT
1. No early end to QE
2. No early rate hike schedule
3. No 50 bp hike coming
4. Plenty of room to raise
before jobs picture impacted
FED STATEMENT 26 JAN
Chatter between Dec + Jan Fed meetings
“50 bps out of the gate”
“8 hikes in 2022”
“Reducing balance sheet immediately”
sources: HiddenLevers
hawkish Fed
surprise nearly
impossible due to
analyst chatter
Max Draw Down From ATH
S&P 500 -10%
NASDAQ -19%

8. SCENARIO UPDATE JAN RATES INSANITY
DECEMBER HAWKISH PIVOT MARKET OVERTHINKING QT
1. No early end to QE
2. No early rate hike schedule
3. No 50 bp hike coming
4. Plenty of room to raise
before jobs picture impacted
FED STATEMENT 26 JAN
Chatter between Dec + Jan Fed meetings
“50 bps out of the gate”
“8 hikes in 2022”
“Reducing balance sheet immediately”
sources: HiddenLevers
Max Draw Down From ATH
S&P 500 -10%
NASDAQ -19%
hawkish Fed
surprise nearly
impossible due to
analyst chatter

9. sources: FRED, WSJ
Fixed Income + Credit Markets = ZZZZZ
FED ROULETTE EQUITIES VS BONDS

10. sources: HiddenLevers, Yahoo Finance, Fortune, Schwab
FED ROULETTE RATE-HIKE CYCLES
S&P 500 Returns in Rate-Hike Cycles
S&P 500 Avg Performance in Rate-Hike Cycles since 1955 by day
Days after hiking cycle begins
Hiking cycles avg. solid growth in first year
Negative effects on stocks were delayed
Months after hiking cycle begins
Fast hikes = stocks struggle
S&P Performance
in Slow & Fast
Rate-Hike Cycles
since 1946

11. sources: HiddenLevers, Factset
dec 2018 dec 2019 nov 2021 jan 2022
S&P 20.67 24.88 29.59 24.80
AAPL 12.97 23.18 28.57 28.41
MSFT 23.57 27.47 38.38 31.60
GOOGL 23.91 27.23 28.68 24.89
• Pandemic valuations on the S&P burnt off-
P/E today same as 12/31/19
• Megacaps valuations fairly similar to
December 2019
• WFH Darlings P/E still elevated, even after
last six months burn off
P/E Ratio: S&P + Tech Megacaps
P/E Ratio: WFH Darlings
dec 2018 dec 2019 nov 2021 jan 2022
ROKU Negative Negative 155.32 72.8
ZM Pre IPO 1118.07 66.84 37.32
SHOP Negative Negative 63.01 32.08
NFLX 99.87 78.35 61.15 32.02
ETSY 79.28 59.07 87.09 41.88
S&P 500 Price vs S&P 12-month Forward P/E Ratio
FED ROULETTE MULTIPLE COMPRESSION

12. sources: HiddenLevers
FED ROULETTE NEGATIVE EXTERNALITIES
FED COULDN’T CARE LESS FED LOSING SLEEP
accidentally inverting
the yield curve
Fed balance sheet reduction stops yield curve inversion

13. sources: HiddenLevers, JP Morgan,
FED ROULETTE VOLATILITY
Volatility = normal in a regime change
ABNORMAL

14. FED ROULETTE GOOD
GDP grew at 6.9%,
even with Omicron
Earnings growth at 9%
double usual pace
Many large cap
earnings beats in 2022
POWELL
THREADS NEEDLE

15. FED ROULETTE GOOD
GDP grew at 6.9%,
even with Omicron
Earnings growth at 9%
double usual pace
Many large cap
earnings beats in 2022
POWELL
THREADS NEEDLE
JAN 2022
EARNINGS SURPRISES
IBM
WELLS FARGO
TEXAS INSTRUMENTS
AMEX
J+J
RAYTHEON
MICROSOFT
BLACKSTONE
UNITED HEALTH
TESLA
INTEL
NETFLIX
BOEING
JP MORGAN
GENERAL ELECTRIC

16. FED ROULETTE BASELINE
Regime change volatility
to be expected
Overemphasis on
hawkish talk, not actions
Hawkish surprise from
Fed now difficult
MARKET
OVERTHINKS TIGHTENING

17. FED ROULETTE UGLY
alters secular growth of
large caps = MISTAKE
Fed still not acting
on inflation
Fighting inflation
usually hurts growth
POLICY MISTAKE

18. GOOD
S+P 500
3480
-20 %
S+P 500
5000
+15 %
S+P 500
4230
-3%
UGLY
RATE HIKES
TRIGGER RECESSION,
FED PUT KICKS IN
RATE-HIKE CYCLE DOES
NO HARM TO
EARNINGS GROWTH
MOMENTUM
MARKET WAY AHEAD OF FED
ON TIGHTENING FORECAST
FED ROULETTE MACRO RISK PARITY
BASELINE
MARKET
OVERTHINKS TIGHTENING
10Y
2.75
+95 bps
10Y
2.50
+70 bps
10Y
3.00
+120 bps
POWELL
THREADS NEEDLE
POLICY MISTAKE
NASDAQ
12.7K
-6%
NASDAQ
15.1K
+35 %
NASDAQ
10K
-26%

19. Q4 2021 GDP = good long-term sign
Nasdaq assault a result of 2021 IPO/SPAC binge
Current volatility is normal – 2021 was the market
anomaly, not 2022
10% equities haircut typical pre regime change
FED ROULETTE WHAT TO SAY

20. FEBRUARY INFLATION + ENERGY