Cathie Wood sounds the alarm on risk of US recession and 'serious slowdown' in China

• Ark Invest's Cathie Wood is sounding the alarm on a possible US recession and Chinese slowdown.
• In a quarterly letter to investors, Wood said the yield curve flattening may signal a recession.
• She said a downturn would put innovation stocks championed by Ark in "deep value territory."

Ark Invest's Cathie Wood sounded the alarm on a potential recession in the US and a big slowdown in China in her firm's quarterly report Wednesday.

"During the next three to six months the market is likely to focus more on the risk of recession in the US, the serious slowdown in the Chinese and emerging market economies, and potentially a surprising drop in inflation," Wood, the founder and chief executive officer of Ark Invest, wrote in her letter to investors.

Real estate turmoil in China points to a slowdown in the world's second-largest economy, and the flattening of the yield curve, aka the difference between the 10-year and 2-year US Treasury notes, suggests the increased chance of a recession and lower inflation in the US in the coming year.

Others have also been flagging the possibility of a market downturn. Kristina Hooper, the chief global market strategist at Invesco, a firm with $1.5 trillion in assets under management, has said it's been so long since the last correction, that the odds are growing. And those odds have been exacerbated by the US Federal Reserve's plans to shrink its balance sheet and hike interest rates.

A recession, Wood said, means that innovative tech stocks — like the ones her firm has made big bets on – could fal into "deep value territory" over the next five years, a view she's made known previously.

"Typically, during a slowdown, the adoption of new technologies accelerates as concerned businesses and consumers are more willing to change behavior patterns," she wrote, adding that, "The coronavirus crisis transformed the world significantly and permanently, suggesting that many innovation-driven stocks could be productive holdings during the next five to ten years."

Her comments come as Ark Invest's flagship fund, the Ark Innovation ETF, has sunk already about 20% so far this year. That's on top of a 24% drop in 2021 after a star-studded 2020 when the fund surged more than 150%.

The flagship fund's biggest holdings include EV-maker Tesla, video communications-platform Zoom, virtual-healthcare company Teladoc, TV-streamer Roku, and crypto exchange Coinbase, according to the site. Despite steep declines in shares of high-growth companies like Zoom and Teladoc in the last year, Wood said previously the stocks now represent a bargain as the companies improve revenues and profitability.