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Cathie Wood Watch: Seeing Stagdeflation Rather Than Stagflation

'The supply chain crisis is disappearing,' asset manager Cathie Wood says. 'I wouldn’t be surprised to see an implosion of used car prices.'
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Many experts see stagflation -- sluggish economic growth combined with rising inflation -- on the horizon.

Hotshot money manager Cathie Wood and Nancy Lazar, chief global economist at Piper Sandler, agree that growth will slow. But they think that inflation will slow, too.

“We are probably going to see more deflationary forces at the end of all this than inflationary forces,” Wood said in a webinar. “We are in the early stages of seeing this.”

Consumer prices soared 8.3% in the 12 months through April.

Foreign central banks began raising interest rates a year ago, and that is weighing on the economy, Lazar said. “The economy already is starting to slow.” 

She says the economic slowdown will force the Federal Reserve to stop raising interest rates later this year.

Wood: GDP Drop Not a Fluke

Wood agrees. She noted that the U.S. economy shrank 1.4% in the first quarter. But the drop stemmed mostly from inventory and export declines. Consumer spending, which accounts for about 70% of GDP growth, continued to rise. So, many economists shrugged off the GDP decline.

But not Wood. “I think it’s a real number and shouldn’t be dismissed,” she said.

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Lazar pointed out that the huge fiscal expansion of 2020-2021 has largely ended. Decreased government spending could take 3 percentage points off GDP, she said. Monetary tightening into a period of fiscal tightening creates a major headwind for the economy, she said.

Weakness in the retail sector is a problem, the two luminaries agreed. Wood cited weak first-quarter earnings at Walmart  (WMT) - Get Walmart Inc. Report and Target  (TGT) - Get Target Corporation Report, with unit sales falling and inventories ballooning. “That probably got the Fed thinking: Are we overdoing it?” she said.

Walmart, Target and Home Depot  (HD) - Get Home Depot Inc. (The) Report saw inventories rise more than 30% in the first quarter, Wood said. “The supply-chain crisis is disappearing. I wouldn’t be surprised to see an implosion of used car prices.”

Deflation Ahead

Multiple quarters of corporate-profit declines should be coming, Lazar said. 

The massive hiring of 2021 will stop this year and ultimately turn into firings, she said. The economic slowdown should push inflation below the Fed’s target of 2% by year-end, she said.

Wood sings the same tune. “There will be a quick unwind in inflation,” she said. “My confidence in that scenario has increased tremendously. ... Even rents will start to adjust.” She said inflation could turn negative.

Naturally, Wood says this will be a good time for her “disruptive” technology stocks: “During tough times, innovation gains traction.” 

For example, she said, consumers are increasingly shifting to online shopping.

“As soon as the stock market unravels, and they realize the Fed is making a mistake, I think equities will take off again,” Wood said. And she sees quick rotation back to growth stocks from value stocks. “Disruptive technology will become a much bigger factor in the economy.”