Bonds say inflation has peaked, but here’s what Cathie Wood says the stock market needs to hear to make an honest rally

Dow Jones Industrial Average
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-0.76%

down 2.9%, S&P 500
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-0.76%

down 2.5% and the tech-heavy Nasdaq Composite Index
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-0.96%

fell more than 2% in a week of shortened trading over the holiday season, seeing some of the doldrums offset the tough year-to-date gains.

Although the Nasdaq is up 3.7%, the S&P 500 is up 1.6% and the blue-chip Dow is up 0.5% in 2023, Wood said on Thursday that there is one key factor that could hold investors back. investment and market.

Yes, that’s the Fed. But more specifically, that’s what the Fed hasn’t said, Wood argued.

The US central bank raised its benchmark interest rate in an attempt to quell inflation, which has quelled speculative asset purchases.

And while there are signs that inflation may be stabilizing, if not falling, Wood said investors need to hear from the Fed that it will stop pushing interest rates higher.

The founder of ARK Invest said a drop, rather than an increase in interest rates, represents an increase in borrowing costs, signaling that the market is betting that inflation is indeed being managed appropriately.

Indeed, U.S. wholesale prices fell 0.5% in December, marks the biggest drop since April 2020when the US economy was first hit by the COVID pandemic.

The fall in inflation was largely due to falling food and gasoline prices, but the decline underscores growing evidence of falling inflation.

The Fed is trying to restore annual inflation gains to pre-pandemic levels of 2% by sharply raising interest rates, which could potentially push the US into a recession.

Bond yields, which fall as prices rise, have acted as if the Fed might be ready to end raising rates. Yields tend to rise as investors sell debt and prices fall in anticipation of higher interest rates on newly issued Treasuries.

So far, output has fallen – rather than increased.

“We are pleased to see bond yields drop here,” Wood said Thursday during a quarterly conference held for followers and investors of her ARK Invest fund suite.

“Like in [the] In the early ’80s, the stock market needed to hear the Fed say it was signaling the end of rate hikes,” Wood said, referring to inflation. peak at the highest level in about 40 yearshighest since the early 1980s.

That improved inflation dynamics could translate into a better setup for the struggling ARK and its flagship ARK Innovation fund.

Wood’s exchange-traded funds were the darlings of Wall Street’s post-COVID-19 speculative boom. ARK’s Innovation
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fund increased by about 150% in 2020 and helped boost Wood’s reputation, but rapidly rising interest rates scuppered her growth-focused investment strategy. ARK Innovation ends 2022 down nearly 67% after falling 24% in 2021.

However, the top fund is in vogue right now, up more than 11% year-to-date.

Wood has estimated that the U.S. may have already slipped into a recession, and the extent to which the benchmark interest rate (up 18 times, she estimates) could have more impact than the eventual rate hike, which economists say is more likely to be affected. economy called the final interest rate.

“I think the change in interest rates is more important than the degree,” she said. The federal funds rate is currently between 4.25% and 4.50%, after staying close to 0% during the peak of the pandemic in 2020.

To be sure, the Fed may be reluctant to make any definitive changes to its current policy.

On Thursday, Federal Reserve Vice Chairman Lael Brainard, one of the most dovish of the top US central bankers, spoke of the need to keep interest rates high.

“Even with the recent moderation, inflation remains high and policy will need to be sufficiently restrictive for a while to warrant this,” Brainard said in a speech at the University of Chicago Booth School of Business. inflation back to 2% on a sustainable basis.” .