Benzinga - by Shanthi Rexaline, Benzinga Editor.
Ark Invest founder and fund manager Cathie Wood drew flak after she made a bleak assessment of current market conditions in a post on X, formerly Twitter.
Risk Aversion In Play: “Search for cash and safety in the equity markets today is as intense as that during the Great Depression in the early 1930s,” Wood said in the post. Her comments came as she quote-posted a video clip of her monthly “In the Know” video series.
In 1932, there was “massive fear,” crowding into the same stocks, just because it looked so simple, she said in the clip. From 1939 to 1946, the market went up and the larger-cap stocks underperformed relative to the rest of the stocks, she said.
“When fear dissipated, the market broadened out and rewarded risk-taking once again,” Wood said.
While noting that the market is currently at all-time highs, the stock picker said one should look into how much indexation and momentum in a few stocks are driving the rally.
In a healthy market, there will be a broadening of the rally, which could come about when interest rates fall, she said. When the Federal Reserve’s dot plot began pointing to much lower interest rates in the fourth quarter of 2023, the bull market in equities broadened dramatically, she added.
“This far this year, the opposite has happened. In our view, more price deflation and lower interest rates will activate coiled equities,” the Ark Invest founder said.
Is the market over-concentrated? ARK CEO/CIO @CathieDWood shares her thoughts and market predictions. Watch this month's "In The Know" where she provides an in-depth analysis of this chart and more.— ARK Invest (@ARKInvest) May 22, 2024
Social-Media Reacts: Commenting on Wood’s post, a social media user asked “Where is this deflation we’ve been seeing?” apparently referring to the sticky inflation that is keeping the Fed from reversing its rate hikes. The aggressive rate-hike cycle the central bank began in March 2022 has lifted the Fed fund rates to a 22-year high of 5.25%-5.50%.
Wood is among the camp that says the central bank was basing its decision on lagging indicators of inflation and that the economy is already in a deflationary environment, with prices dropping below their pre-COVID-19 levels.
Tolou Capital Management founder Spencer Hakimian schooled Cathie by pointing to her the markets were at all-time highs.
Tesla short Jim Chanos also weighed in on Wood’s comment about a depression-like environment. “The ‘Great Depression’..?! This is complete financial insanity. The markets today are nothing even remotely like 1932-37,” he said.
The "Great Depression"…?! This is complete financial insanity. The markets today are nothing even remotely like 1932-37. https://t.co/83QG9Vity3— Diogenes (@WallStCynic) May 23, 2024
Why It’s Important: Despite the inflationary and higher interest-rate environment, the economy has held up fairly well, thanks to the resilient labor market and consumers. Consumers, who propel two-thirds of economic activity, continued to spend, as they dipped into their savings and also lived on credit.
But the situation may not be as bleak as some doomsday prophets predict. The stock market is on a roll, corporate profit growth remains strong and down the line, the Fed will need to begin cutting rates. As always is the case, as the market rally gets entrenched, laggards will play a catchup.
Meanwhile, Wood’s fund has underperformed the broader market, with the heavy exposure to mostly unproven smid-cap companies with disruptive innovation potential apparently backfiring.
The firm’s flagship Ark Innovation ETF (NYSE:ARKK) is trading way below its February 2021 high of $159.70. Ram Ahluwalia of Lumida Wealth recently slammed the stock-picking strategy of Ark’s funds. “Literally throwing random darts at tickers would out-perform ARKK,” he said.
The SPDR S&P 500 ETF Trust (NYSE:SPY), an exchange-traded fund that tracks the broader S&P 500 Index, rose 0.20% to $527 in premarket trading, according to Benzinga Pro data. The ETF has jumped 11% year-to-date. The iShares Russell 2000 ETF (NYSE:IWM), an ETF that tracks the broader Russell 2,000 Index, has gained a more modest 1.5%.
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Photo via WEF on Flickr
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