ARK Invests Cathie Wood says that the Federal Reserves interest rate hikes have pushed the U.S. economy to the brink of recession and theres one key indicator that proves itthe only problem is that Fed officials are ignoring the data.
The yield curve is more inverted now than at any time since the early 80s when double-digit inflation was entrenched, Wood wrote in a Wednesday tweet. The bond market seems to be signaling that the Fed is making a serious mistake.
The yield curve describes the relationship between yields on U.S. government bonds with different durationsor maturity dates.
Typically, short term bonds yield less than long term bonds. If you were to graph this relationship, youd see an upward sloping curve. But when that relationship changes, and short term bonds yield more than long term bonds, the yield curve inverts.
And thats whats happening now: the yield on the 2 year Treasury was 4.32% on Wednesday, while the yield on the 10 year Treasury was just 3.50%
Typically, an inverted yield curve is pointing to a recession and/or lower than expected inflation, Wood explained.
Every recession since 1957 has been preceded by a yield curve inversion, and the St. Louis Federal Reserve describes yield curve inversions as good predictors of recessions. But they also note that theyre not perfectly correlated and the exact relationship isnt completely understood.
Wood argues that the inverted yield curve is more of a red flag for the Fed today than it was in the early 80s, however, because of the depth of the inversion and how long it has persisted. Theres now an 80 basis point gap between the yield on 10-year and 2-year Treasuries, and the yield curve has been inverted since early July.
The famed tech investor has spent the past year arguing that the Fed is making a mistake by raising interest rates, despite inflation remaining near a four-decade high.
Wood penned an open letter to the central bank in October asking officials to rethink their rate hikes and claiming that they are stoking deflation. And in November, she hinted that central bank officials risk sparking another Great Depression if they continue their inflation fight.
In our view, deflation is a much bigger risk than inflation, Wood reiterated on Wednesday. Commodity prices and massive retail discounts are corroborating this point of view.
While Wood isnt the only Fed critic to sound off about the risks of aggressive interest rates, she may be one of the ones with the most to gain.
Woods devotion to pursuing innovation in the stock market has come back to bite her this year. Her flagship fund, the ARK Innovation ETF, is down 64% year to date as rising interest rates continue to weigh on the high growth, high risk stocks that make up its holdings.
Seven out of the ARK Innovation ETFs 10 largest investmentsincluding Zoom Video, Block, Roku, UiPath, Teladoc, Unity Software, and Shopifyare down over 60% on the year.
And the three stocks that arentTesla, Exact Sciences, and CRISPRare down 56%, 44%, and 36% year-to-date, respectively.
Wood went on to defend ARK Invests investment philosophy on Wednesday, noting that oil prices have dropped to under $75 per barrel, but S&P energy sector ETF that tracks energy stocks is still close to a record high.
Meanwhile, many pure play, early stage innovation stocks have dropped below their coronavirus lows. Truth will win out, she wrote.
Our new weekly Impact Report newsletter will examine how ESG news and trends are shaping the roles and responsibilities of todays executivesand how they can best navigate those challenges. Subscribe here.
