Bonds say inflation has peaked, but that’s what Cathy Wood says the stock market needs to hear to stage a real rally

Bullish stock investors have been attacked in the month so far this week, after a relatively flattering start to 2023 after an ugly 2022.

Still, Cathy Wood has some thoughts on what might really light the fire under those hoping to place bullish long bets on the stock.

Dow Jones Industrial Average DJIA,
The S&P 500 SPX fell 2.9%,
It is from 2.5% and a high-tech Nasdaq Composite index company,
It fell over 2% in a holiday-shortened trading week that saw some pessimism off the hard-won year-to-date gains.

Although the Nasdaq is up 3.7%, the S&P 500 is up 1.6% and the Dow blue-chip is up 0.5% in 2023, Wood said Thursday that there is a key factor that could hold back investors and markets.

Yes, it’s the Fed. But Wood argued, but more specifically, that’s what the Fed didn’t say.

The US central bank has been raising record interest rates in an effort to crush inflation, which in turn has been suppressing speculative asset purchases.

And while there are signs that inflation may be stabilizing, if not abating, Wood said investors need to hear the Federal Reserve say it will stop raising interest rates.

The founder of ARK Invest said that a decline, rather than an increase in interest rates, which represents an increase in borrowing costs, indicates that markets are betting that inflation is, in fact, being appropriately managed.

In fact, wholesale prices in the United States fell by 0.5% in December, recording the largest decline since April 2020when the US economy was first hit by the COVID pandemic.

The drop in inflation has been largely attributed to lower food and gasoline prices, but the slide highlighted mounting evidence of declining inflation.

The Fed is trying to return the annual increase in inflation to pre-pandemic levels of 2% by sharply raising interest rates, which could push the US into recession.

Bond yields, which fall as prices rise, have been acting as though the Federal Reserve might be ready to end its rate increases. Yields tend to rise as investors sell off debt and prices fall in anticipation of higher rates on newly issued Treasury notes.

So far this year, yields are down — instead of up.

“We’re very pleased to see bond yields down here,” Wood said Thursday during a quarterly seminar held for followers and investors of her ARK Invest fund group.

“Pretty much like in [the] In the early 1980s, stock markets need to hear the Fed say it’s signaling interest rates are going up.” The peak is at its highest level in 40 yearsthe highest percentage since the early 1980s.

This improved inflation dynamic may translate into better preparation for the beleaguered ARK, and the ARK lead innovation fund.

Wood’s ETFs were once the darling of the post-COVID-19 speculative boom on Wall Street. ARK Innovation ARKK,
The fund is up about 150%. During 2020 and helped improve Wood’s reputation, but rapidly rising interest rates helped upend its growth-focused investment strategy. ARK Innovation ended 2022 down nearly 67% after falling 24% in 2021.

However, the main fund currently has a surge advantage of over 11% year-to-date.

Wood estimated that the United States may indeed be in a recession and that the degree to which interest rates are measured (an 18-fold increase, she estimates) may be more influential than the eventual increase in rates, which economists refer to as the final interest rate.

“I think the change in interest rates is more important than the level,” she said. Federal funds rates are currently between 4.25% and 4.50%, after being close to 0% during the height of the pandemic in 2020.

To be sure, the Fed may balk at making any final changes to its current policy.

Thursday, Fed Vice Chairman Lyle Brainard, one of the most pessimistic US central bankers, has spoken out about the need to keep interest rates high.

“Even with the recent moderation, inflation remains high, and policy will need to be sufficiently constrained for some time to make sure inflation returns to 2% on a sustainable basis,” Brainard said in a speech at the University of Chicago Booth School of Business. .

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