Written by David Randall
NEW YORK (Reuters) – Strong inflation that helped push two-year US Treasury yields to 14-year highs continued to burn some winners of the so-called pandemic bubble on Friday.
The ARK Innovation Fund, managed by star stock picker Cathy Wood, fell 4.3%, helped by sharp declines in major stocks including Intellia Therapeutics (NASDAQ:) Inc and Block Inc, the company formerly known as Square.
The fund is now trading nearly 20% below its late-August high, when investors hoped that the Fed’s rate hike would help the fund rise 40% from a two-year low it reached in May. The fund is down nearly 55% from the year to date.
Higher returns punish the more speculative and unprofitable companies in which Wood tends to invest by lowering the expected future value of the returns while increasing the cost of capital.
Other speculative assets, including shares of AMC Entertainment (NYSE:) Holdings Inc, and meme shares fell on Friday as well, with the movie theater operator losing about 5% and Bed Bath and Beyond Inc (NASDAQ: down 5.2%.
“Market cycles have their own dynamics, and we are currently in a downturn as selling pressure is feeding on itself,” said Charles Lemonides, president of hedge fund Value Works LLC. “The valuation of some of these stocks during the pandemic has been so exaggerated that there must be more pain ahead for them.”
The higher-than-expected inflation data released on Tuesday prompted investors to raise interest rates further from the Federal Reserve. Markets now expect a 16% chance the central bank will raise benchmark interest rates by 100 basis points at its meeting ending September 21, up from a 0% chance a week ago.
Jimmy Cox said that despite Friday’s declines, speculative assets are becoming more attractive given the possibility that the Fed will over-tighten financial conditions and be forced to cut interest rates early next year as the global economy slides into recession, caused in part by increases violent action by the Federal Reserve. Managing Partner of Harris Financial Group.
“Most speculative stocks have fallen more than is reasonable given where we think the prices will end. You could be a buyer of many of these stocks,” he said.