While in Montreal on Thursday, star US manager and tech enthusiast Cathie Wood said the stock market is currently sending a “very strong” signal to the Fed: its rate hikes are too firm.
Posted at 5:00 a.m.
The founder and CEO of Ark Invest, a Florida investment company offering a dozen exchange-traded funds, considers “very aggressive” the remarks made by the American Federal Reserve (Fed) this week by raising its key rates by three quarters point.
The Fed is late with its rate hikes, it says, and will make another mistake by continuing to hike them. “That’s what the stock market is telling us and that’s why it’s down,” she said Thursday during CFA Montreal’s Annual Forecast Night.
Cathie Wood pointed out in particular that the price of default hedges (credit default swaps) — a kind of insurance policy against the risks of non-payment of a debt of a company — was currently skyrocketing.
The risk of default by financial companies is increasing as the Fed tries to slow the economy, she said, hinting that if financials were to fall, the economy could plunge into a deep recession.
The Fed only cares about inflation, a late economic indicator [lagging indicator]and that is rather unfortunate.
Cathie Wood, Founder and CEO of Ark Invest
She says she is stunned and believes the Fed will turn around and reassess the situation if the jobless rate rises as quickly as it thinks.
Aided by strong media coverage and a very active presence on Twitter, where she has 1.4 million followers, Cathie Wood has been elevated to star manager status during the pandemic with the popularity of tech stocks.
PHOTO PHILIPPE BOIVIN, THE PRESS
The evening attended by Cathie Wood and Ben Inker was hosted by Vincent Delisle, from the Caisse de dépôt et placement du Québec.
The assets under management of her Ark Innovation fund — the flagship product of the firm she heads — amounted to more than 12 billion US dollars at the beginning of April. Zoom, Tesla, Roku and Bloc (Square) are among the top positions in this fund.
After posting an impressive return of more than 150% in 2020, the Ark Innovation fund’s stock has lost about 70% of its value since its peak last summer, as investors turn their backs on growth stocks, especially those technologies, in the current inflationary environment leading to rising interest rates. Having quadrupled in value during the pandemic, Ark Innovation’s stock is now back to its March 2020 level.
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While Cathie Wood considers herself to be optimistic by nature and believes that innovation will solve our problems, she nevertheless says she is “very worried”.
“Consumer morale is plummeting and we are experiencing an inventory boom,” she says. Taken with their inventories, retailers will have to clear their merchandise, which will lead to price drops, she warns. If consumers expect prices to drop, they will delay purchases.
This is one of the reasons why she believes that the risk of deflation is more important than the risk posed by inflation.
PHOTO PHILIPPE BOIVIN, THE PRESS
Some 800 people gathered Thursday evening at the Palais des congrès de Montréal.
“The COVID-19 health crisis was a warm-up for the crisis we are going through now and disruptive innovation will continue to help us solve our problems,” she also said Thursday evening in front of more than 800 people gathered at the Montreal Convention Center, where the event took place.
No worries
Also invited by CFA Montreal to give his opinion on the markets and the economy, Ben Inker, co-head of asset allocation at GMO, a Boston asset manager co-founded by well-known investor Jeremy Grantham, said expect the economy to plunge into recession.
He maintains, however, not to worry too much.
PHOTO PHILIPPE BOIVIN, THE PRESS
Ben Inker, Co-Head of Asset Allocation at GMO
Most of the time, recessions don’t matter. When we take stock a few years after a recession, we realize that they have not left permanent traces on the economy or the markets.
Ben Inker, Co-Head of Asset Allocation at GMO
If a recession is unusually deep, however, that’s different, he says. “Depression can be painful. »
And when the economy goes through a financial crisis associated with a recession, it can cause substantial trouble, he adds. “But generally speaking, a recession isn’t that bad. If we were to plunge into a recession, there is no reason to believe that it would be particularly damaging. The banking system does not seem very vulnerable today. »
On the other hand, he says, “typically in a recession corporate profits go down and you can imagine the stock market wouldn’t take it very well.”
Ben Inker does not know if a recession would be enough to eliminate inflationary pressures. He hopes so. “But the specter of a recession shouldn’t keep us awake. »