Cathie Wood Claims Economy Already In A Recession—Warns Inflation And Inventories Pose ‘Big Problem’

Topline

High-profile stock picker Cathie Wood conceded to being wrong about the duration of high inflation that's contributed to her fund's steep decline this year while doubling down on her belief that the economy has fallen into a recession—defying a vast majority of experts noting a recession is unlikely this year despite growing odds of one next year.

“We were wrong on one thing—and that was inflation being as sustained as it has been,” Wood said ... [+] Tuesday while defying economists projecting that the U.S. will avoid a recession this year.

David Yellen/The Forbes Collection

Key Facts

“We think we are in a recession,” Wood, the founder and CEO of New York City’s Ark Invest, said on CNBC's Squawk Box Tuesday, noting that excess inventory driving up costs and leading to wider-than-expected profit shortfalls for corporations like Walmart and Target is a “big problem” facing the economy.

Wood first declared the U.S. had fallen into a recession last week, warning on Twitter that massive inventories (often viewed as a leading indicator for demand) have the potential to unwind and hurt growth for the rest of the year, as consumer sentiment falls to record-low levels.

On Tuesday, Wood also admitted to being wrong about inflation "being as sustained as it has been," acknowledging it as a “bigger problem” than she believed it would be last year, given supply constraints exacerbated by Russia’s invasion of Ukraine.

The money manager’s comments come a week after Elon Musk, whose Tesla is among one of Ark’s biggest holdings, called a recession in the U.S. “inevitable” and said a downturn would “more likely than not” occur in the near term, though he didn't offer a specific time line.

The U.S. economy unexpectedly shrank 1.5% last quarter as the omicron variant of Covid-19 swept across the nation, but economists are widely calling for a return to growth this quarter, thereby avoiding the two consecutive quarters of negative GDP growth that constitute a technical recession.

Also on Squawk Box Tuesday morning, New York Fed President John Williams said a recession is not the most likely scenario, noting that the “economy is strong” despite expectations that growth will slow in the coming quarters as the Fed’s interest rate hikes take hold.

Tangent

Ark Invest's flagship fund has posted staggering losses this year as top holdings like Tesla, cryptocurrency exchange Coinbase and virtual healthcare firm Teladoc collapse amid a broader market selloff. After skyrocketing 150% in 2020, the fund has plunged nearly 70% from an all-time high in January 2021 and more than 50% this year alone.

Contra

In a research note on Monday, analysts at S&P Global Ratings said the economy has enough momentum to avoid a recession this year, but warned “what’s around the bend next year is the bigger worry.” The economists put the odds of a recession in 2023 at 40%—more than the 35% odds Morgan Stanley issued last week. However, some have been more optimistic: In a recent note, LPL Financial analysts said the odds of a recession are likely closer to 33%, if not lower, given that corporate earnings are healthy and inflation pressures are likely to ease, even if the “process to get there isn't smooth for markets.”

Key Background

The Fed’s withdrawal of pandemic stimulus measures has tanked stocks and sparked growing fears of a recession. Major stock indexes plunged into bear market territory earlier this month ahead of the Fed’s largest interest rate hike in 28 years, and the gloomy sentiment has ushered in waves of layoffs among recently booming technology and real estate companies. “We don’t believe the Fed can stop the issues that are causing inflation on the supply side without absolutely wrecking the economy, but at this point, it looks like they are resigned to the fact that it must be done,” says Brett Ewing, chief market strategist of First Franklin Financial Services.

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