Ark Invest CEO Cathie Wood mentioned on CNBC Squawk Box that the US is already in a recession. She believes the major culprit are inventories, which she says have never been as large as they currently are throughout her 45 year career.
Even though she admits that she underestimated the severity of inflation, not expecting it to be as sustained as it is, she points out that it was due to factors which could not have been predicted. One of these factors is Russia’s invasion of Ukraine.
Consumer Sentiment Falls To A New Low
Inflation, which is measured by the consumer price index, is at a 40-year high. This is being strongly felt by consumers. Consumer sentiment recently fell to record lows. She references the University of Michigan’s Surveys of Consumers, which showed a reading of 50 in June, down from an initial reading of 50.2 earlier in the month, and well below May’s level of 58.4.
The latest number is the lowest reading on record, going back to the late 1970s.
A recession – a significant decline in economic activity that is spread across the economy and that lasts more than a few months – seems to be imminent. The first reading on U.S. economic growth during the second quarter of 2022 is expected to be released by the end of July by the Bureau of Economic Analysis. Although the Federal Reserve as well as most top investment banks in the U.S. are not currently anticipating a recession in the near future, the Atlanta Fed’s GDPNow forecast tells a different story. It shows the economic growth of the United States collapsing to zero during the second quarter of the year.
Cathie Woods Still Sees Deflation As The More Likely Outcome Long-Term
Cathie Woods explained that while inflation was worse than she thought, she is convinced that the bigger problem facing the economy is in fact deflation. She cited how supply chain issues caused by the pandemic had led major retailers to mismanage their inventories. This led to an oversupply of goods that were originally in demand during the pandemic.
Michael Burry recently made a similar prediction as Cathy, referencing the feared “Bullwhip Effect”.
This in addition to the drop in consumer sentiment, as well as an inverted yield curve are major indicators that we are already in a recession. Other deflationary signals include trading patterns of gold, the U.S. dollar, oil and copper. Gold which is often viewed as an inflation hedge is down by 12% and has fell to the low end of its range. She reckons that the continued increase in interest rates by the Fed is a mistake.
Cathie Remains Positive, Despite the Economic Challenges And Aggressive Sell-Off Of Technology Stocks
The S&P is down 20% year-to-date, the Nasdaq is down roughly 30%, the stock market has not seen a worse beginning of the year since 1962. The performance of bonds hasn’t been this bad since 1788. Woods mentioned that regardless of the bleak economic outlook in the short and mid-term, investors should not panic.
Cathie, not immune to the effects of the macroeconomic headwinds, has had a rough year as well. Her clients have been one of the biggest losers this year, as Ark Invest’s funds have fallen sharply from their all-time highs.
In this general risk-off environment, disruptive technology stocks have been selling off aggressively. Despite this massive loss, Wood said her clients are mostly sticking with her and money is still coming in as investors seek diversification in this down market.
Just like Cathies clients at Ark Invest, a possible next step for investors could be to make a list of companies that you believe in and are currently “on discount”. Look for companies you believe could make a good profit in the next three or four years and invest in their stocks at these discounted prices. This is a proven way to build wealth in the long-term. Woods’ top picks are Zoom Video Communications, Tesla and Roku.
As always, make sure you conduct your own research, hedge risks with appropriate position sizes and remain cautious. While the current economic period has some resemblance to the past, we are facing many unprecedented challenges and in many ways are currently in uncharted waters.
