ARK Invest CEO: ‘The Federal Reserve Rate Cut Was Absolutely Not a Mistake’

During an interview on “Bloomberg The Close” on October 4, Cathie Wood, Co-Founder and CEO of ARK Investment Management, said the Federal Reserve’s rate cut was absolutely not a mistake. She explained that it has been interesting to watch revisions in economic activity, especially the downward revisions in employment numbers, which had been much weaker than originally reported.

Wood noted that she looks at earnings reports and revenues, and many companies have shown negative revenues. She added that recent headline numbers, particularly some of the upward revisions in personal income, have been influenced by government transfer payments and dividends.

Wood emphasized that the cyclical part of the economy is sick. She pointed out that one sector after another has been falling into a recession, despite what the headline numbers may suggest. Wood stated that housing, in particular, fell immediately when the Federal Reserve began raising rates, and it remains down 20 to 40%, which she considers a recession. She also mentioned that non-residential construction is in recession, and the auto sector is very weak.

When asked about the latest payroll report, which showed 254,000 jobs added in September, Wood asked for time to finish her previous thought. She reiterated that several sectors of the economy are in recession and pointed to small and medium businesses, whose confidence is currently at levels seen during the 2008-2009 financial crisis. She added that certain cyclical pricing measures have been deflationary.

Wood believes that prices coming down and consumers getting better deals are sustaining economic activity. She mentioned that many people claim that real growth causes inflation, but in this case, as in most times historically, cutting prices stimulates more activity. Wood expressed confidence that as long as the labor market holds up, which the latest report confirmed, and companies like Walmart, Costco, and auto manufacturers continue to cut prices or increase discounts, economic activity will persist. However, she warned that attempts to raise prices could backfire, citing FedEx as an example, which turned negative on revenue growth and tried to raise prices.

Wood also said that the deflationary undercurrents in the economy would become more evident in the coming year. She argued that deflation is not always negative and can result from innovation, specifically technologically enabled innovation. Wood pointed to electric vehicle (EV) prices as an example, noting that both prices and production costs are coming down. She believes that productivity is stronger than expected, allowing companies to lower prices and preserve their margins.

When asked if she still believes inflation could go negative and unemployment could rise above 5%, Wood responded that she is pushing her expectations out. She acknowledged that inflation has levitated in the 3.5 to 4% range but has now fallen below 3%. She said more companies are trying to attract consumers with lower prices, and she still believes inflation will fall much lower than expected, possibly even turning negative. Wood stated that money growth, a leading indicator for inflation, was negative for about a year and a half, and she expects that to drive inflation down further.

Regarding unemployment, Wood said it could still rise above 5%, but the latest productivity data has given her pause. She suggested that if companies achieve productivity growth from existing employees, they may not need to lay off workers. Instead, they may lower prices to maintain consumer demand.

On the topic of the upcoming U.S. election, Wood explained that ARK’s focus is on innovation. She expressed concerns that excessive regulation had been driving innovation off U.S. shores, particularly in the crypto and digital assets sectors. Wood highlighted that regulators, especially the SEC and FTC, have been hostile to innovation, preventing innovative companies from enjoying liquidity events through mergers and acquisitions (M&A). She welcomed the growing bipartisan alignment on the importance of innovation and was pleased to see that the roles of the heads of the SEC and FTC may be on the line.

When asked which candidate would be better for the investment environment, Wood said she would focus on innovation. She emphasized that her preference lies with whichever candidate supports lowering regulations, as she believes that excessive regulations are strangling the economy. Wood stated that regulations are harming small businesses, big businesses, and innovation.

Regarding investing in AI, Wood pointed to OpenAI’s recent $6.5 billion funding round, which gave it a valuation of $157 billion. She explained that ARK invested $250 million, the minimum amount required to open up financial documents. Wood said ARK has been researching AI for ten years, which is why they invested early in Nvidia. Although ARK has since reduced its Nvidia holdings, Wood said ARK continues to search for the next big play, particularly in the software layer.

She mentioned that Palantir and UiPath are among ARK’s top holdings. Wood said that while many of the software companies ARK is excited about are private, she is thrilled that ARK’s venture fund allows regular investors to access companies like OpenAI and SpaceX for as little as $500. She believes that the software industry will shift from software as a service (SaaS) to platform as a service (PaaS) as companies customize their own software using platforms such as those from OpenAI, Anthropic, and Google.

When asked about selling Nvidia and buying Coinbase, Wood acknowledged that Nvidia has outperformed Coinbase since that time. However, she pointed out that from the time ARK bought Coinbase, it initially performed better than Nvidia. Wood expressed her focus on the future, stating that she believes the software layer will generate significant growth over the next 5 to 10 years.

Wood explained that if Nvidia’s price comes down, she might consider adding it back into ARK’s flagship fund. She admitted that she might have been influenced by momentum trading and was cautious about investors who never owned Nvidia getting in late and possibly becoming weak holders. However, Wood said ARK was happy with the profits it made from Nvidia, which was the third-largest contributor to its flagship fund.

Wood said that Tesla’s AI project is the largest in the world. She stated that autonomous mobility is a key factor in ARK’s prediction that Tesla’s stock price could reach $2,600 by 2029.