ARK CEO Cathie Wood on the Fed, Crypto, SVB and her belief in innovation stocks

Wood’s comments now seem particularly prescient, after the collapse of Silicon Valley Bank sparked widespread turmoil in stock and bond markets this month. Now many Wall Street analysts and economists are questioning whether the Fed has tightened monetary policy too much – or too quickly – in the fight against inflation. Investors and regulators are examining how resilient the banking system is in the face of higher interest rates.

In a recent conversation with Barron’sWood says the Fed’s rate hikes have already gone too far, and as a result, there are more troubling signs that the economy may be heading for recession and even possibly deflation.

Wood’s ARK fund rose to prominence in 2020 when its holdings of innovation- and growth-driven stocks soared during the pandemic-triggered rally. Her flagship ARK Innovation exchange-traded fund (ticker: ARKK) returned a whopping 152% that year. Wood was named to the list above Barron’s 100 Most Influential Women in US Finance in 2023.

While ARK’s portfolios have suffered major losses in the past two years, says Wood Barron’s she’s not giving up on growth and tech stocks—or crypto—despite the tough macroeconomic environment and hawkish central bank policies that are pulling those investments.

However, the rise in interest rates that has hit technology stocks continues. On Wednesday, the Fed raised its target federal-funds rate from 4.75% to 5%, marking the ninth increase in about a year. After the decision, Fed Chairman Jerome Powell emphasized that the broader financial system was “sound and resilient.” But stocks continued to fall and government bonds rose, signaling a lack of investor confidence.

The market has never seen interest rates move up so quickly on a relative basis, says Wood. At 5%, the benchmark rate has seen a 20-fold increase from just 0.25% last year. Even during the aggressive monetary tightening of the late 1970s, rates only saw a quadrupling – to 20% from 4.75% over 3½ years.

“This is a huge shock to the system,” says Wood. The economy now has a greater probability of a deflationary gift rather than an inflationary boom, she adds.

The CEO says the strong jobs reports seen so far this year may just be seasonal, as the unusually warm winter kept more workers employed than economists typically expect. The tight labor market – with more vacancies than available workers – also means that companies did not want to lay off employees, even though business conditions softened, she adds.

“I think at some point this year we’re going to see some serious declines in employment,” says Wood.

The inverted yield curve since last summer is yet another harbinger of a potential recession. A yield curve inversion is when the yield on the 10-year Treasury note falls below the yield on the two-year note — a sign that bond investors are bearish about the economy and expect interest rates to slide lower in the future.

Before this month’s banking sector panic, the yield curve was in negative territory by about 100 basis points, similar to the level seen when the Fed raised interest rates in the early 1980s. But back then the 10-year yield was about 15% – compared to just 4% now – meaning the current inversion is much deeper and more worrying on a relative basis, says Wood.

Wood has also warned about the skyrocketing prices of credit default swaps – particularly for banks – since last year. CDS act as insurance against credit default: Lenders concerned that a borrower may potentially default on their bonds or loans can use a CDS to offset – or swap – this risk by paying an ongoing premium payment to another investor. Higher CDS prices indicate that the market is concerned about the risk of default.

Earlier this month, regulators said they would guarantee all uninsured deposits from customers affected by the failures of Silicon Valley Bank and Signature Bank. In turn, CDS costs for the banking sector have since come down a bit, but not as much as they should, says Wood. That means the market still expects “more shoes to drop.”

Such concerns about bank balance sheets also illustrate the risks of a centralized banking system, says Wood. Cryptocurrencies, on the other hand, have become a haven for investors when the financial system comes under stress, she says. Since Silicon Valley Bank was seized by regulators on March 10, the price of Bitcoin

has risen 38%.

“It’s taken another crisis for people to understand that the crypto network’s decentralization and transparency means it has no central point of failure,” says Wood, “Any government that tries to cancel it is just going to drive the innovation to another country.”

Wood is one of the biggest crypto bulls on Wall Street. In a recent ARK report, she predicted that Bitcoin’s price would reach $1.5 million by 2030. When the report was published eight weeks ago, the digital currency was trading around $24,000, and has since risen to $28,000.

The recent proliferation of digital assets does not fascinate Wood, because the problems stem mainly from crypto-related institutions, she says, and not the technology itself. The underlying networks “didn’t skip a beat” during the crypto industry’s recent turmoil, she says.

Wood’s belief in innovation and growth stocks is also unwavering. As inflation crept up and the Fed began raising interest rates last year, growth stocks — with high valuations and weakening future cash flows — fell out of favor, sending ARK funds tumbling. Over the past two years, the firm’s eight US-listed ETFs have lost an average of 53%.

Wood doubles down on a return. As many investors sold the shares in ARK’s portfolios in favor of safer, cheaper names, Wood says she has acquired them at the lower prices and consolidated the portfolios towards the names with the highest conviction.

The number of holdings in the ARK Innovation ETF, for example, has shrunk by half to 28 this year from 58 in 2021. More than half of the portfolio is in just seven names, including Tesla (TSLA),

Zoom Video Communications (ZM) and Coinbase Global (COIN).

Concentration doesn’t always mean higher risk, Wood says, citing a recent paper from the firm that shows “how significant the decline has typically been after a consolidation move.”

The consolidation also meant that ARK had to sell some holdings with lower convictions at a loss, she says. As a result, the firm has built up significant tax losses which can be used against future gains to minimize tax bills.

“We were focused on playing what we call the ground war,” says Wood.

So far this year, the ARK Innovation ETF is up 21%, but still trades 76% below its February 2021 record high.

Write to Evie Liu at [email protected]