Cathie Wood's $2 billion loss shows the Fed burst the 'speculative bubble' in stocks, top JPMorgan strategist says
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- Cathie Wood revealed Tuesday that her flagship fund lost over $2 billion last year.
- Her struggles sum up how rising interest rates are affecting markets, according to the CEO of JPMorgan Asset Management.
- “When the Federal Reserve hits the brakes, something goes through the windshield,” George Gatch said.
The massive losses suffered by Cathie Wood's Ark Invest show that the Federal Reserve's aggressive interest-rate hikes have burst the bubble in stocks, according to the CEO of JPMorgan Asset Management.
"When the Federal Reserve hits the brakes, something goes through the windshield," George Gatch said Tuesday at the $2.5 trillion asset manager's European Media Summit, per the Financial Times.
"We saw that with a bursting of a speculative bubble, of Ark," he added.
Wood said in an interview with Bloomberg TV Tuesday that she'd lost over $2 billion selling stocks during last year's market rout.
In 2022, the Fed raised borrowing costs from near zero to around 4.5% – and it's pressed ahead with further interest-rate hikes this year.
That fueled a massive selloff in Wood's flagship Ark Innovation ETF, which trades under the ticker ARKK and counts EV maker Tesla, video platform Zoom, and crypto exchange Coinbase among its top holdings.
When the Fed tightens, growth stocks like those tend to see their share price plummet because higher interest rates chip away at the future cash flows that make up a key part of their valuations.
From its peak in February 2021, ARKK has crashed 74% as investors started to weigh up the impact that rising interest rates would have on stock prices. It's down 38% since the Fed made its first hike of the cycle on March 16, 2022.
"The valuation hit has been so severe to our strategy, and that was all related to the Fed jacking up interest rates 19-fold in less than a year. Unprecedented," Wood told CNBC's "Squawk on the Street" in a separate interview Tuesday.
"It's like an earthquake," she added.
As well as pointing to Wood's massive losses, JPMorgan Asset Management boss Gatch said that the collapse of Silicon Valley Bank and "a huge repricing in fixed income" showed the impact that the Fed's tightening has had on financial markets, according to the FT.
SVB's share price cratered two weeks ago after it disclosed a $1.8 billion loss on its bond holdings and customers like Peter Thiel's Founders Fund pulled their deposits from the bank.
The bond market has also been battered by the Fed's year of rate hikes.
Yields on 2-year US Treasury notes have jumped over 200 basis points to 4.23% over the past 12 months, while 10-year yields are up 130 basis points to 3.63% over the same period. Bond yields rise when prices are falling.