(The Street) - ARK Innovation (ARKK) - Get ARK Innovation ETF Report fund manager Cathie Wood is best known for her focus on investing in innovative companies. Unfortunately for Wood, her funds have been hammered by the market downturn over the last couple of quarters. Ark’s flagship Innovation ETF has fallen more than 55% YTD. Recently, Wood offered up her stance on inflation, a key driver of market pessimism.
To boil things down, Wood is skeptical of the Fed's hawkish positioning on hiking interest rates. She believes large hikes could lead to serious macroeconomic problems down the road.
Here is a deeper look into Cathie Wood's argument.
Cathie Wood Thinks That Hiking Rates Is A Mistake
According to her recent statements, Wood thinks that the Fed is making a mistake in raising interest rates to tame inflation. She claims inflation will be "short-lived."
Cathie has been indicating for some time that the Fed is more concerned about its legacy than the actual economy. As reported in late June, Woods believes that deflationary signals have been ignored. She says that interest rate increases have been based too exclusively on CPI – which Wood considers to be a lagging inflation indicator.
Wood advises looking to gold’s performance for a truer inflation indicator. She points out that gold’s price rocketed from $1,350 per ounce before COVID to a peak near $2,000 during 2020. Since then, though, prices have fallen, nearly hitting the $1,700 mark.
Finally, Cathie said that if bloated retail inventories and stock prices are indicative of employment rates and wages, fears of cost-push inflation - as seen in the 1970s - should fade over the next six months.
Cathie's Mantra
Cathie Wood's Ark Invest looks for disruptive innovation companies that can foster long-term growth. According to Wood, the ARK fund seeks to invest in companies that offer products or services that have the ability to change the world for the better.
Wood believes that innovation can "save" us from many of the largest macroeconomic problems facing the world today.
"'Innovation solves problems’ was my mantra during the COVID crisis. We now have a plethora of serious problems. Innovation solves problems."
An example of Ark Invest's unwavering belief in innovation companies is the recent addition the fund made to three of its existing positions: Unity Software (U) - Get Unity Software Inc. Report, a platform for movie studios, graphic designers, and architects; Exact Science (EXAS) - Get Exact Sciences Corporation Report, a company offering at-home colon cancer screener; and Twilio (TWLO) - Get Twilio Inc. Class A Report, a leader in in-app communication solutions.
Is Cathie Wood Right About Inflation?
Cathie Wood's concern is that increasing interest rates will make it harder for growth companies to expand. Higher costs of capital will lower investment inputs and stymie employment. I.e., rising interest rates could put lots of “innovation” on ice.
Raising interest rates is one of the Fed’s only tools to curb runaway inflation. Still, there is concern among experts that an overuse of this blunt tool could cause a damaging recession. The cure may be worse than the disease.
While it is difficult to say definitively whether Cathie Wood's position is correct, many investors do seem to agree with her. Although Ark Innovation fund is down 50% in 2022, the fund has recorded inflows of almost $2 billion. That indicates plenty of folks are confident in Wood's position and see a "buy-the-dip" opportunity after the market’s rough several months.
(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes.)
By Bernard Zambonin
July 18, 2022
Co-producer of The Street's financial channels: Apple Maven, Amazon Maven and Wall Street Memes. Researcher and operations manager at DM Martins Research.
