According to Cathie Wood’s Ark Invest, the U.S. economy is likely to face a “somewhat harder than soft” landing as a result of recent interest rate hikes. The firm attributes this projection to a policy misstep by the Federal Reserve, which they believe is evident in the bond market.
In Ark Invest’s Q3 2023 Quarterly Report, they state, “While the Fed is determined to squelch inflation by increasing interest rates, the bond market has been signaling that it could be making a major mistake.”
Ark Invest highlights a significant flattening of the yield curve, with a decrease of 267 basis points from March 2021 to July 2023, resulting in an inversion from +159 to -108 basis points. This inversion is the most severe since the early 1980s, when the Federal Reserve was combatting high inflation levels.
They further note that since July 2023, the yield curve has experienced a “bear steepening,” as longer-term rates have been rising at a faster rate than short-term rates, reducing the inversion to -30 basis points. This trend suggests that both real growth and inflation may fall below expectations.
Ark Invest believes that the Federal Reserve is heavily relying on lagging indicators, such as employment and headline inflation, while ignoring leading indicators that are hinting at a potential recession and price deflation.
During Q3, Cathie Wood’s actively managed exchange-traded funds (ETFs) experienced more significant declines compared to the broader market averages. Below is the performance of Wood’s ETFs during Q3:
- S&P 500 (SP500): -3.6%
- ARK Innovation ET (NYSEARCA:ARKK): -10.8%
- ARK Next Generation Internet ETF (NYSEARCA:ARKW): -8.6%
- ARK Autonomous Technology & Robotics ETF (BATS:ARKQ): -7.9%
- ARK Genomic Revolution ETF (BATS:ARKG): -18.6%
- ARK Fintech Innovation ETF (ARKF): -7.7%
- ARK Space Exploration & Innovation ETF (ARKX): -9.3%