Cathie Wood’s famed ARK investment fund has had a stellar 2023 so far, with shares trading 30% higher than at the beginning of the year. But that hardly offsets the firm’s massive losses in 2022 that Wood blames on the Federal Reserve.
The Fed has hiked interest rates eight times in the past year, with more likely on the way as the central bank continues its war against inflation. Prices have been mostly easing for the past several months, climbing 6% during the year ending in February. While it's a drop from the 9.1% annual rate in June, it’s still far higher than the Fed wants inflation to be, and the central bank has signaled that it will implement more rate hikes to get closer to its target.
The rate hikes have made accessing consumer and business loans more expensive and dealt a blow to the stock market, with the S&P 500 down more than 11% over the past year. Tech stocks have been hit hard, with the tech-heavy Nasdaq down around 20% since January 2022. But it’s high-growth stocks with huge valuations—the companies that represent Wood’s ARK fund’s bread and butter—that have suffered the most. The difficult investing climate wiped out nearly 70% in value at her ARK Innovation Fund last year alone.
“It's the valuation hit of the last year that has been so severe to our strategy…that was all related to the Fed jacking up interest rates 19-fold in less than a year,” Wood said in an interview Tuesday with CNBC, adding that the pace of Fed rate hikes was “unprecedented.”
Wood painted herself as a specialist in disruptive innovation investing early in the pandemic when her fund was soaring high. But many of the companies Wood traded in—including Tesla, Roku, and Zoom—regressed from their pandemic-era darling status and extremely high valuations during the bear market that began last year. Meanwhile, higher interest rates have dampened confidence in cryptocurrencies and early-stage and commercially untested companies that often take years before investors start seeing returns—risky bets Wood has also been happy to make.
The pace and size of interest rate hikes adds up to a difficult time for fund managers in general, especially so for those like Wood, who doesn’t see conditions easing up anytime soon.
“It's like an earthquake, not just for our strategy, actually. We now think the earthquake is rolling off of our strategy and into other strategies,” she told CNBC about rate-sensitive stocks, adding: “Those that are cyclical, we think are going to face some quite severe challenges during the next, I’m going to say six to nine months.”
ARK’s about-turn
Wood’s strong year so far has come as some tech stocks—including Tesla, a long-time favorite of Wood’s and one of ARK’s largest holdings—had a resurgent start to the year. But even though it will take time for stocks and investment funds like ARK to pick themselves back up from last year’s carnage, if ever, Wood is counting on things continuing to go her way.
A number of banking failures in the U.S. this month, including tech’s prolific lender Silicon Valley Bank, have raised questions as to whether the Fed is becoming too aggressive with interest rate hikes, and if the central bank is risking a financial crisis in its mission to bring down inflation.
It is unclear to what extent the banking crisis will moderate the Fed’s approach, if at all, although officials will likely give an indication on Wednesday when they announce details about the next rate hike. Some economists including Jason Furman, an Obama administration economic adviser, are predicting a 25 basis point increase, smaller than what many analysts had forecasted before the banking crisis. Other economists including Nobel-winning Paul Krugman as well as Goldman Sachs analysts have said the Fed might even consider pausing rates until the situation around SVB’s collapse calms further.
“Interest rates coming down is going to be another booster,” Wood told CNBC. Wood has long argued that disinflation is a bigger concern than inflation, and that the Fed is likely overdoing rate hikes and risking a recession: “The bond market seems to be signaling that the Fed is making a serious mistake,” she wrote in a December tweet, referring to the inverted yield curve, a commonly-cited recession indicator.
But the banking crisis has so far largely played out to Wood’s benefit. Earlier this month, ARK’s largest fund attracted nearly $400 million of inflows in a single day, the firm’s largest cash influx since April 2021, Bloomberg reported last week. The gains were largely due to lower investor expectations of many large interest rate hikes in the near future. While it is still unclear if ARK’s gains this year will hold, much will depend on the direction the Fed chooses to take Wednesday when it will discuss the next rate hike.
