Cathie Wood expects a U.S. recession in 2023 that could help her fund’s performance

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Though it’s been a less-than-rosy year for Cathie Wood’s Ark Invest, she sees strength ahead for the firm’s investment strategy if the U.S. does fall into a recession. The firm’s flagship ARK Innovation ETF is down more than 60% on the year, underperforming the broader market. The fund consists mostly of tech names, which tend to underperform in rising interest rate environments like investors are seeing now as the Federal Reserve hikes rates to tame high inflation. But, as the central bank’s aggressive rate hikes start to slow the economy and potentially tip the U.S. into a recession, Wood expects the tide to turn for her fund. “Interest rates will follow inflation,” she said during a CNBC Pro Talk on Monday. “It does seem like inflation has peaked and if this is the main reason that our strategy and strategies like ours have been pummeled in the last 18 months to two years, then one would surmise that we should benefit from the opposite scenario.” There was some recent signaling of this — the ETF had its best day ever, jumping 14%, following a weaker-than-expected inflation reading. When sentiment gets very bleak, or it’s clear that the economy is deteriorating, that’s often when the Fed would pause interest rate hikes or even begin cutting them. That generally benefits growth strategies like hers, she said. She added that another reason her strategies tend to outperform in a pre-recessionary environment is that they are looking towards new leadership, and the companies she invests in are setting themselves up to benefit from what Ark sees as one of the most massive exponential growth opportunities in history . “The other reason is because our fundamentals are far superior to those of companies who are more cyclically biased,” she said. “And so, we will have superior revenue growth and our cash flows will continue to increase on balance during a period like that.” Biggest recession factor right now In terms of a potential 2023 recession, the biggest factor Wood sees right now is the aggressive pace of interest rate hikes to cool off hot inflation. She sees Federal Reserve Chair Jerome Powell as taking a page from previous Fed Chair Paul Volcker, who dealt with high inflation in the 1970s and 80s by pushing interest rates up quickly. Powell is doing the same thing now – in the last four meetings of the central bank, they’ve raised their benchmark rate by 0.75 percentage points each time. These hikes, combined with earlier ones this year, mean the fed funds rate has gone from near zero to roughly 3.75% to 4.00%. “Taking interest rates up 16-fold, we think is a mistake,” said Wood. She added that she sees an inventory recession ahead because of how companies over-ordered as demand spiked during Covid, fueled by pandemic stimulus measures. “We have a huge inventory problem,” Wood said, adding that she expects most of it to be cleaned out by Christmas. Still, ramifications for retail profits will likely be severe, she said. She doesn’t agree that 2023 will be the start of a downward spiral. Instead, she expects a synchronized global recession with economic issues in China due to zero-Covid policies and property and the energy crisis in Europe. “I think the rest of the world will lead us down because they are in a recession and in a more serious recession than I think the U.S. will be,” said Wood.

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