Bonds say inflation has peaked, but here’s what Cathie Wood says the stock market needs to hear to stage a bona fide rally


Bullish stock investors have taken a hit in the month so far this week, following a relatively upbeat 2023 kickoff after an ugly 2022.

However, Cathie Wood has some reservations about what could really fuel a fire among those hoping to place optimistic long bets on stocks.

The Dow Jones Industrial Average DJIA,
is down 2.9%, the S&P 500 index SPX,
is off 2.5% and the tech-heavy Nasdaq Composite Index COMP,
is down more than 2% in a holiday-short trading week that saw some gloom wipe out last year’s hard-won gains.

While 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 there is a key factor that could help investors and markets to prevent.

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

The US central bank has pushed up benchmark interest rates in an attempt to quell inflation, which in turn has suppressed speculative asset purchases.

And while there are signs that inflation could stabilize, if not recede, Wood said investors need to hear the Fed say it will stop raising interest rates.

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ARK Invest’s founder said a pullback, rather than a rise in interest rates, which represents a rise in borrowing costs, signals that markets are betting that inflation is indeed being adequately managed.

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

The decline in inflation was largely attributed to falling food and gasoline prices, but the decline underlined growing signs of a contraction in inflation.

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

Bond yields, which fall as prices rise, acted as if the Fed might be ready to end its rate hikes. Yields usually rise as investors sell debt and prices fall in anticipation of higher rates on newly issued government bonds.

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So far this year, revenues have fallen, rather than increased.

“We’re very pleased to see bond yields falling here,” Wood said Thursday at a quarterly seminar for followers and investors of her ARK Invest fund suite.

“Just like in [the] In the early 1980s, stock markets need to hear the Fed signal the end of rising interest rates,” Wood said, referring to inflation peaking around a 40-year high, the highest since the beginning of the 1980s. eighties.

Those improved inflation dynamics could translate into a better set-up for the controversial ARK and its flagship ARK Innovation Fund.

Wood’s exchange-traded funds were once the darlings of Wall Street’s post-COVID-19 speculative boom. The ARK Innovation ARKK,
fund rose about 150% in 2020 and helped polish Wood’s reputation, but the rapid rise in interest rates helped capsize her growth-oriented investment strategy. ARK Innovation ended 2022 with a drop of nearly 67% after a 24% drop in 2021.

However, the flagship fund is currently enjoying an uptick, up more than 11% over the past year.

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Wood has estimated that the US may already be in a recession, and that the extent to which benchmark interest rates (up to 18-fold, she estimates) could have more of an impact than the eventual increase in rates, which economists call the final rate.

“I think the change in interest rates is more important than the level,” she said. Federal Funds rates are currently between 4.25% and 4.50%, after being near 0% during the height of the pandemic in 2020.

Of course, the Fed may be reluctant to make any definitive changes to its current policy.

On Thursday, Lael Brainard, Vice Chairman of the Federal Reserve, one of the most lenient of America’s top bankers, spoke of the need to keep interest rates high.

“Even with the recent moderation, inflation remains high and policies will need to be restrictive enough for some time to ensure inflation returns to 2% sustainably,” Brainard said in a speech at the University of Chicago Booth School of Business. . .



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