evening forecast | “The market is sending a very strong signal to the Federal Reserve.”

While in Montreal on Thursday, US director and tech enthusiast Katie Wood said the stock market is currently sending a “very strong” signal to the Federal Reserve: its rate increases are too tight.

Posted yesterday at 5:00 am

Richard Dufour

Richard Dufour
Journalism

The founder and CEO of Ark Invest, a Florida investment firm that offers dozens of exchange-traded funds, considers “extremely aggressive” comments the US Federal Reserve (Fed) made this week to raise its key rates by three-quarters of a point.

The Fed has been late in raising rates, he says, and will make another mistake by continuing to raise them. “That’s what the stock market is telling us and that’s why it’s going down,” she said Thursday during CFA Montreal’s annual forecast night.

Cathy Wood specifically noted that the price of default hedges (credit default swap) – a type of insurance policy against the risk of non-payment of the company’s debts – at the moment it is rising significantly.

She said the risk of default by financial firms is increasing as the Fed tries to slow the economy, a sign that if the financial situation declines, the economy could plunge into a deep recession.

The Fed only cares about inflation, which is a lagging economic indicator [lagging indicator]which is somewhat unfortunate.

Cathy Wood, Founder and CEO of Ark Invest

She says she is surprised and believes that the Fed will turn around and reassess the situation if the unemployment rate rises as fast as it thinks.

Backed by strong media coverage and a very active Twitter presence, where she has 1.4 million followers, Kathy Wood has been promoted to star manager during the pandemic with the popularity of tech stocks.

PHOTO PHILIPPE BOIVIN, PRESS

The evening, attended by Cathy Wood and Ben Enker, was hosted by Vincent Delile, of Caisse de dépôt et placement du Québec.

The assets under management of the Ark Innovation Fund – the flagship product of the company that heads – amounted to more than 12 billion US dollars at the beginning of April. Zoom, Tesla, Roku, and Bloc (Square) are among the top spots in this fund.

After posting 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, especially those technologies, in the current inflationary environment driving up interest rates. Having quadrupled in value during the pandemic, Ark Innovation stock is now back at its March 2020 level.

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While Kathy Wood considers herself an optimist by nature and believes that innovation will solve our problems, she nevertheless says she is “very concerned”.

“Consumer confidence is collapsing and we’re seeing a boom in inventory,” she says. It warns that if they take inventory, retailers will have to liquidate their merchandise, which will drive prices down. If consumers expect lower prices, they will delay purchases.

This is one reason why she believes that the risks of deflation are more important than the risks posed by inflation.

PHOTO PHILIPPE BOIVIN, PRESS

About 800 people gathered Thursday evening at the Palais des Congrès in Montreal.

She also said Thursday night in front of more than 800 people gathered at the Montreal Convention Center where the event took place.

do not worry

He also invited CFA Montreal to give his opinion on markets and the economy, said Ben Inker, co-head of asset allocation at GMO, a Boston asset manager co-founded by well-known investor Jeremy Grantham, predicting the economy will plunge into a recession.

But he emphasizes, however, that there is no need to worry too much.

PHOTO PHILIPPE BOIVIN, PRESS

Ben Enker, Co-Head of Asset Allocation at GMO

Most of the time, recessions don’t matter. When we take an inventory after a few years of recession, we realize that it hasn’t left lasting effects on the economy or markets.

Ben Enker, Co-Head of Asset Allocation at GMO

If the recession is unusually deep, he says, that’s different. “Depression can be excruciating.”

He adds that when the economy goes through a recession-related financial crisis, it can cause major problems. But overall, the recession isn’t that bad. If we were to plunge into a recession, there is no reason to believe that it would be particularly harmful. The banking system does not look very weak today. »

On the other hand, he says, “corporate earnings usually fall in recessions and you can imagine the stock market won’t handle it well.”

Ben Enker does not know whether a recession will be enough to remove inflationary pressures. So hoped. But the specter of stagnation should not keep us awake. »



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