forecast evening | “The market is sending a very strong signal to the Fed”

US star manager and tech enthusiast Cathie Wood said in Montreal on Thursday that the stock market is currently sending a “very strong” signal to the Fed that its rate hikes are too firm.

Posted yesterday at 5:00am

Richard Dufour

Richard Dufour
The press

The founder and CEO of Ark Invest, a Florida-based investment firm that offers a dozen exchange-traded funds, said the US Federal Reserve’s (Fed) comments this week, raising interest rates by three quarters of a point, were “very aggressive”.

The Fed is behind on its rate hikes, they say, and will make another mistake by raising them further. “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.

In particular, Cathie Wood pointed out that the price of failovers (Credit default swaps) – a kind of insurance policy against the risks of non-payment of a company’s debt – was currently skyrocketing.

Financial companies’ risk of default is rising as the Fed tries to slow the economy, she said, hinting that if financials fall, the economy could slide into a deep recession.

The Fed only cares about inflation, a late economic indicator [lagging indicator]and that’s pretty unfortunate.

Cathie Wood, Founder and CEO of Ark Invest

She says she’s stunned and believes that if the unemployment rate rises as fast as she thinks, the Fed will reverse and reevaluate the situation.

Supported 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 moderated by Vincent Delisle of the Caisse de dépôt et Placement du Québec.

Her Ark Innovation Fund – the flagship product of the firm she runs – had assets under management of more than $12 billion as of early April. Zoom, Tesla, Roku and Bloc (Square) are among the top positions in this fund.

After an impressive return of more than 150% in 2020, Ark Innovation Fund stock has lost about 70% of its value since its peak last summer as investors turn their backs on growth stocks, particularly those technologies, in the current inflationary environment interest. After quadrupling in value during the pandemic, Ark Innovation’s stock is now back to where it was in March 2020.

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While Cathie Wood is naturally optimistic and believes innovation will solve our problems, she says she is “very concerned”.

“Consumer confidence is collapsing and we’re seeing an inventory boom,” she says. Overwhelmed with inventories, retailers will have to clear their goods, which will lead to price falls, she warns. If consumers expect prices to go down, they will delay buying.

This is another reason why she considers the risk of deflation to be more important than the risk of inflation.


PHOTO PHILIPPE BOIVIN, THE PRESS

Around 800 people gathered at the Palais des Congrès de Montréal on Thursday evening.

“The COVID-19 public health crisis has been a warm-up to the crisis we are going through now, and disruptive innovation will continue to help us solve our problems,” she told more than 800 people gathering at the Montreal Convention on Thursday night had center where the event took place.

Do not worry

Ben Inker, co-head of asset allocation at GMO, a Boston-based wealth manager co-founded by prominent investor Jeremy Grantham, was also invited by CFA Montreal to provide his perspective on the markets and the economy during the recession.

However, he insists 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. If we take stock of a few years after a recession, we find that it left no lasting mark on either the economy or the markets.

Ben Inker, co-head of asset allocation at GMO

But when a recession is unusually deep, it’s different, he says. “Depression can be painful. »

And when the economy goes through a financial crisis coupled with a recession, it can cause significant problems, he adds. “But in general, a recession isn’t that bad. Should we fall into a recession, there’s no reason to think it would be particularly damaging. The banking system does not appear to be very vulnerable today. »

On the other hand, he says, “Typically, corporate earnings go down in a recession, and you can imagine the stock market wouldn’t take that well.”

Ben Inker doesn’t know if a recession would be enough to remove inflationary pressures. He hopes so. “But the specter of a recession shouldn’t keep us awake. »

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