The dramatic price swings in stocks and bonds is a warning sign that the Federal Reserve could provoke a financial crisis by hiking interest rates aggressively, Ark Invest CEO Cathie Wood has said.
Stocks have declined sharply in April, and bonds have tumbled across 2022, as investors bet that the Fed will raise rates hard to slow growth and curb red-hot inflation.
The S&P 500 fell 2.8% Tuesday as investors took stock of company earnings and fretted about the economy. The benchmark US stock index was down 9.2% over the last month, as of Wednesday morning.
“Equities and bonds seem to be warning the Fed that its policy measures could cause an economic and/or financial crisis: equities are swooning and the yield curve is nearly [in] negative territory,” Wood tweeted Tuesday.
Wood’s comment came on the same day Deutsche Bank predicted a major US recession in a research note. The bank said the Fed would hike rates to above 5%, from the current level of 0.25%, to get a grip on inflation.
The Ark Invest CEO added that the recent dollar rally is a warning signal, that could impose problems on the global economy. The dollar index has soared 7.44% in 2022 to 103.10, as of Wednesday.
“Another metric suggests that Fed policy already is too restrictive: the dollar,” Wood said. “Against expectations, the dollar has increased more than 13% from its lows last year, a real burden for emerging and other markets with dollar-denominated debt, and a powerful deflationary force.”
Wood is unlikely to be a supporter of the central bank’s policy, given that the Feds’ hawkishness has heavily impacted her firm’s investment funds.
The Ark Innovation ETF, which specialized in investing in technology companies, has plummeted almost 50% this year. It was down almost 70% from its February 2021 peak as of Wednesday. Ark Innovation ETF is leading the way to the worst performing month since its creation.
The tech-heavy Nasdaq index fell 4% Tuesday to its lowest level since December 2020.