The Fed will likely 'get the market going' soon by signaling it'll ease off on its tightening campaign, Cathie Wood says
- Cathie Wood expects the Federal Reserve to signal a pivot from its tightening bias, fueling a stock market revival.
- "A change in rhetoric will get the market going," she said Monday.
The Federal Reserve will likely trigger a stock market rally next year by signaling a shift away from its current policy stance that favors higher interest rates, according to Cathie Wood.
The Ark Invest chief said Monday that she "would be surprised" if the central bank raises its benchmark rate to 5% or higher — levels predicted by many economic commentators and implied by money market prices.
"A change in rhetoric toward 'maybe we're not going up after 4.5%' will get the market going," Wood told Yahoo Finance. "The market is trying to figure out how high is high, and you've got some observers and economists out there saying maybe it could be 6% or 7%."
"So the market is holding back and saying wait, we need some evidence," she said. "I think the evidence is becoming very strong" that interest rates are close to peaking, she added.
The bond market, for one, is mirroring expectations that borrowing costs should eventually decline, with longer-term yields now retreating from this year's peaks, she said. The rate on 30-year Treasuries has dropped to about 3.5% from as high as 4.43% in October.
Wood also said that oil prices are one sign that inflation is going to start falling — which could allow the Fed to pause monetary tightening or pivot away from it sooner than previously expected.
Oil benchmarks have declined significantly in the second half of 2022 after surging past $130 a barrel when Russia invaded Ukraine in February, with Brent crude priced at $75.77 and West Texas Intermediate crude changing hands at $71.09 at last check.
That's despite China's recent move away from its 'zero-COVID' policies, which is expected to support oil prices as demand in the world's second-largest economy rebounds after nearly three years of harsh lockdowns.
"One of the most visible commodity prices out there, oil, despite a lot of potential support, can't get going," Wood said.
"Even with China opening up, supposedly a support for oil prices, it just can't rally," she added.
Rising interest rates have hammered Wood's own portfolio in 2022, with her flagship Ark Innovation exchange-traded fund down 64% year-to-date.
The Fed has raised interest rates from 0.25% to 4% this year as part of its campaign to tame inflation. That hurts Wood's favored growth stocks because their balance sheets are likely to be more reliant on cheap borrowing.
"Chairman Powell has taken up interest rates 16-fold, we've never seen that before," Wood said. "I do believe that the surprises are going to be on the low side of inflation expectations, dramatically so — we believe inflation will drop below the Fed's 2% rate sometime next year."
"As inflation unravels, interest rates come down, raising the present value of future cash flows," she added. "That kind of environment benefits our portfolio."