In an effort to tame rampant inflation, the Fed is raising interest rates aggressively. And rising rates have become a major drag on the stock market and the economy.
But according to Ark Invest's Cathie Wood, the Fed may not stay hawkish for too long.
When asked whether she thinks the Fed will continue raising interest rates or cutting them next year during a recent Bloomberg interview, Wood's answer was "the latter."
"We're getting all kinds of signals that the economy is very weak," she says, pointing out that the labor market may not be as strong as the headline numbers suggest.
"We're hearing one layoff after another. And we know the [Challenger, Gray & Christmas] survey says that layoffs are up 55% to 60% year over year."
It's not a pretty picture. But Wood remains committed to her go-to investment themes.
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'We're in a recession'
Politicians don't like to use the "R-word,' but the numbers suggest otherwise: real GDP in the U.S. slipped at an annual rate of 1.6% in Q1 and then fell another 0.9% in Q2.
Wood acknowledges the dire situation.
"We believe we're in a recession: two consecutive quarters of real GDP declines is the beginning of that definition," she tells Bloomberg. "Three consecutive months of declines in leading indicators, which we have now would suggest the same."
A slowdown in the economy could make the Fed think twice about hiking rates.
But what about soaring inflation?
Wood doesn't believe that the most quoted inflation numbers tell the whole story.
"The CPI, and to some measure the PPI, both of those are lagging indicators. The Fed is driving policy off of lagging indicators."
She explains that gold prices - which she calls "the real inflation gauge" - peaked in August 2020 and are now in the low end of the recent trading range.
Staying committed to innovation
No matter what the Fed does next, its massive rate hikes - or rather the expectation of those rate hikes - have resulted in a slump in the stock market.
The S&P 500 is down 12% year to date, while Wood's flagship fund Ark Innovation ETF (ARKK) tumbled by more than 45% during the same period.
But the super investor is sticking to her guns.
When asked why not keep more cash (instead of allocating it to stocks) given this tough economic backdrop, Wood's response is simple: "We are going to be 100% invested in innovation."
She explains that innovation will solve problems - and there are plenty of problems at the moment.
"We've got the supply chain problems, which we're still hearing about. We've got energy and food prices up because of the war, really hurting consumer purchasing power," says Wood.
"And so I think better, cheaper, faster, more productive, more efficient, more creative, is going to win. That's what innovation is."
Indeed, we can see that investment theme in the top holdings at ARKK.
Tesla (TSLA): the electric vehicle maker is currently the largest holding at ARKK, accounting for 8.9% of the fund's weight. In a report earlier this year, Ark Invest projected a share price of $4,600 for Tesla by 2026 - representing a potential upside of over 400% from where the stock sits today.
Zoom Video Communications (ZM): shares of this video communications company tumbled nearly 40% in 2022, but Ark Invest sees a glorious revival in the not-too-distant future. Ark Invest released a research report in June, outlining how Zoom's share price could reach $1,500 in 2026. Zoom is the second largest holding at ARKK with an 8.3% weight.
Roku (ROKU): Roku - the third largest holding at ARKK - is another beaten-down name. Shares have fallen 65% in 2022. But the company continues to capitalize on the secular trend of on-demand video streaming. In Q2, Roku added 1.8 million active accounts, bringing its total active accounts to 63.1 million.
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