Cathie Wood Says Credit Default Swap Market Is Extremely Bearish As ARKK Fund Drops Another 8%

Shares of the ARK Innovation ETF ARKK dropped 8% Monday and are now down 68.6% over the past 12 months. ARKK fund manager Cathie Wood said Monday morning that the credit default market seems to confirm that the market outlook has significantly worsened.

What Happened? On Twitter, Wood said the credit default market seems to be confirming recent warnings from Tesla Inc. TSLA CEO Elon Musk and JPMorgan Chase & Co JPM CEO Jamie Dimon that the economy could be in trouble.

Related Link: Ark Innovation Fund Rallies: Should Investors Still Avoid ARKK 'At All Costs'?

"Credit default swaps seem to be corroborating Jamie’s 'hurricane' and Elon’s 'super bad feeling' about the economy. As measured by Markit, they have nearly doubled this year, surpassing their Q4’18 highs and heading toward COVID-crisis levels, a deflationary signal," Wood said.

What Is A Credit Default Swap? CDSs are derivatives that are essentially insurance for bondholders, so a pickup in CDS levels indicates that investors are becoming worried about the safety of their investments. Lenders purchase CDSs from investors who agree to pay the lender in the event the borrower defaults on its obligations. CDS played a big role in the volatility in the housing market during the 2008 and 2009 financial crisis. Contracts are customized among the debt issuer, the buyer and the seller. CDSs trade over-the-counter in an illiquid and relatively opaque market, making them difficult to track and regulate.

The price of the United States 5 Years CDS is up 54.8% in the past year, according to the website World Government Bonds.

Wood's Struggles: Wood rose to popularity when her bets on high-risk speculative investments generated some staggering short-term returns during the market's recovery from the COVID-19 sell-off in 2020 and 2021. However, investors have dumped speculative assets in the past 12 months, and the ARKK fund has been among the market's worst performers due to its extremely aggressive growth stock strategy.

In fact, Wood has significantly underperformed the broad market in the long-term. The ARKK fund is now down 14% overall in the past three years, compared to a 31.3% gain for the SPDR S&P 500 ETF Trust SPY in that same stretch.

Benzinga's Take: While Wood's credibility as a stock picker has understandably been tarnished in the past year, her observations about the CDS market are certainly valid. Although, with the S&P 500 entering bear market territory on Monday, it seems fairly obvious that the price of insurance against an economic downturn would be on the rise.

Photo: Courtesy of Diverse Stock Photos on Flickr