ARK CEO Cathie Wood on the Fed, Crypto, SVB, and Her Faith in Innovation Stocks

Wood’s comments now appear particularly prescient, after the collapse of Silicon Valley Bank triggered widespread turmoil in the stock and bond markets this month. Now many Wall Street analysts and economists are questioning whether the Fed has tightened monetary policy too much—or too quickly—in its fight against inflation. Investors and regulators are scrutinizing just how resilient the banking system is in the face of higher rates.

In a recent conversation with Barron’s, Wood says the Fed’s rate hikes have already gone too far, and, as a result, there are more troubling signs that the economy could be headed toward recession and even possibly deflation.

Wood’s ARK funds gained prominence in 2020 as their holdings of innovation- and growth-driven stocks skyrocketed during the pandemic-triggered rally. Her flagship

ARK Innovation

exchange-traded fund (ticker: ARKK) returned a whopping 152% that year. Wood was named to the list of Barron’s 100 Most Influential Women in U.S. Finance in 2023.

While ARK’s portfolios have suffered deep losses in the past two years, Wood tells Barron’s she isn’t giving up on growth and tech stocks—or crypto—despite the tough macroeconomic environment and hawkish central bank policies that are dragging on these investments.

However, the climb in interest rates that has battered tech stocks is still going. On Wednesday, the Fed raised its target for the federal-funds rate from 4.75% to 5%, marking the ninth increase in about a year. After the decision, Fed Chair Jerome Powell emphasized that the broader financial system was “sound and resilient.” But stocks continued to tumble and Treasuries rallied, signaling a lack of confidence from investors.

The market has never seen interest rates move up this quickly on a relative basis, Wood says. At 5%, the benchmark interest rate has seen a 20-fold increase from just 0.25% last year. Even during the aggressive monetary policy tightening of the late 1970s, rates only saw a fourfold increase—to 20% from 4.75% across 3½ years.

“This is a massive shock to the system,” Wood says. The economy now has a higher probability of a deflationary bust rather than inflationary boom, she adds.

The CEO says the strong jobs reports seen so far this year might just be seasonal, as the unusually warm winter kept more workers employed than what economists typically expect. The tight labor market—with more job openings than available workers—also means companies didn’t want to lay off employees, even though business conditions were softening, she adds.

“I think at some point this year we’re going to see some serious declines in employment,” says Wood.

The inverted yield curve since last summer is another harbinger of a potential recession. A yield curve inversion is when the 10-year Treasury note’s yield falls below the two-year note’s yield—a sign bond investors are bearish about the economy and expect interest rates to drift lower in the future.

Before this month’s banking sector panic, the yield curve was in negative territory by about 100 basis points, similar to the level seen when the Fed raised interest rates in the early 1980s. But back then, the 10-year yield was about 15%— compared with only 4% now—which means the current inversion is much deeper and more worrisome on a relative basis, says Wood.

Wood also has been cautioning about the soaring prices of credit default swaps—especially those for banks—since last year. CDS works like an insurance policy against credit default: Lenders worried about a borrower potentially defaulting on its bonds or loans can use a CDS to offset—or swap—that risk by paying another investor an ongoing premium payment. Higher CDS prices suggest the market is worried about the risk of defaults.

Earlier this month, regulators said they would guarantee all uninsured deposits from customers affected by the failures of Silicon Valley Bank and Signature Bank. In turn, CDS costs for the banking sector have since come down a bit, but not as much as they should, Wood says. That means the market still expects “more shoes to drop.”

Such concerns about bank balance sheets also illustrate the risks of a centralized banking system, says Wood. Cryptocurrencies, on the other hand, have become a haven for investors when the financial system comes under stress, she says. Since Silicon Valley Bank was seized by regulators on March 10, the price of

Bitcoin

has surged 38%. 

“It has taken another crisis for people to understand that the crypto network’s decentralization and transparency means that it has no central point of failure,” says Wood, “Any government that tries to cancel it is just going to drive the innovation to another country.” 

Wood is one of the biggest crypto bulls on Wall Street. In a recent ARK report, she predicted that Bitcoin’s price would hit $1.5 million by 2030. When the report was published eight weeks ago, the digital currency was trading around $24,000, and has since increased to $28,000.

The recent rout in digital assets isn’t fazing Wood, because the troubles mostly stem from crypto-related institutions, she says, and not the technology itself. The underlying networks “didn’t skip a beat” during the crypto industry’s recent turmoil, she says.

Wood’s conviction in innovation and growth stocks is unwavering as well. As inflation crept up and the Fed started raising rates last year, growth stocks—with lofty valuations and the depreciation of future cash flows—turned out of favor, sending ARK funds tumbling. Over the past two years, the firm’s eight U.S.-listed ETFs have lost an average of 53%.

Wood is doubling down on a rebound. As many investors sold the stocks in ARK’s portfolios in favor of safer and cheaper names, Wood says she has been scooping them up at the lower prices and consolidating its portfolios toward the highest-conviction names.

The number of holdings in the ARK Innovation ETF, for example, has shrunk by half to 28 this year from 58 in 2021. More than half of its portfolio is in just seven names, including

Tesla

(TSLA),

Zoom Video Communications

(ZM), and

Coinbase

Global (COIN). 

Concentration doesn’t always mean higher risks, says Wood, quoting a recent paper from the firm that shows “how substantial the rebound typically has been after a consolidation move.” 

The consolidation also meant ARK needed to sell some lower-conviction holdings at a loss, she says. As a result, the firm has built up significant tax losses that can be applied against future gains to minimize its tax bills.

“We were focused on playing what we call the ground war,” says Wood.

So far this year, the ARK Innovation ETF has gained 21%, but still trades 76% below its record peak reached in February 2021. 

Write to Evie Liu at [email protected]