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The Tell: Cathie Wood: Fed is ‘probably overdoing it’ in battle with inflation, warns of deflation signs

As technology stocks were being crushed Tuesday in the wake of a stronger-than-expected inflation report, ARK Investment Management’s Cathie Wood was raising concern that the Federal Reserve may be overtightening its monetary policy amid signs of deflation.

“They’re probably overdoing it here,” said Wood, ARK’s founder, chief executive and chief investment officer, during the firm’s monthly market webcast on Tuesday afternoon. “They’ll let something crack first,” including employment, she said, adding that by the time the Fed relents, inflation is going to “unravel to something well below” its 2% target. 

Wood said ARK thinks employment “already is cracking underneath the surface,” particularly among small businesses, and reiterated her view that the U.S. is already in a recession. “We’re seeing a lot of deflation in the pipeline,” she said, pointing to prices of commodities such as oil, lumber and copper falling steeply from their peaks, along with the Baltic freight index. 

U.S. stocks plunged Tuesday, as investors worried the Fed will have to keep up its aggressive pace of monetary tightening to combat stubbornly high inflation. Many investors have feared the central bank risks triggering a recession should it raise interest rates too much too fast in its effort to bring soaring inflation under control. 

The Dow Jones Industrial Average

tumbled 1,276 points, or 3.9%, on Tuesday, while the S&P 500

sank 4.3% and the technology-heavy Nasdaq Composite

plunged 5.2%. All three major stock benchmarks suffered their biggest percentage drops since June 11, 2020, snapping their four-day winning streaks, according to Dow Jones Market Data.

Stocks sank after the U.S. Bureau of Labor Statistics reported Tuesday morning that inflation in August rose 0.1% for an annual rate of 8.3% based on the consumer price index. The reading on inflation, including core data stripping out food and energy prices, was stronger than expected.

All 11 sectors of the S&P 500 finished sharply lower Tuesday, with communication services, information technology and consumer discretionary seeing the steepest losses with declines of more than 5%. Wood’s flagship ARK Innovation ETF

tumbled in the selloff, with its shares ending down 6.8%, according to FactSet data. 

Read: Cathie Wood’s ARK Innovation ETF, tech stocks tumble after August inflation reading 

“Innovation stocks were hit hard” when inflation and rates started to rise last year, even as the broader U.S. stock market broadly climbed in 2021 before capitulating this year, Wood said. 

Shares of the ARK Innovation ETF have tanked about 55% in 2022 through Tuesday, after tumbling 24% in 2021, according to FactSet data. The S&P 500, by contrast, soared almost 27% last year and is down 17.5% so far this year.

Wood said she expects that the Fed will again aggressively raise its benchmark rate by three-quarters of a percentage point later this month. But she also looked further out, anticipating that the central bank will eventually relent from its aggressive stance in response to “some of the deflation that we’re already seeing.” 

When the Fed starts changing its “rhetoric,” hard-hit innovation stocks as a category could then see an “outsized return,” she said.

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