Wooden Sister: This market volatility is caused by algorithms, not fundamentals.

Amid the controversy over AI capital expenditure, Wood Sister attributed the "rapid rise and fall" in the US stock market to the chain reaction of algorithmic selling. On February 14th local time, Kathy Wood, CEO and CIO of ARK Invest, said in her video program "In The Know" that the recent market volatility is more driven by algorithmic trading than by fundamental changes of equal magnitude. She bluntly said at the beginning of the program, "This round of volatility is mostly 'manufactured' by algorithmic trading. Algorithms don't do research like we do." Wood said that this kind of volatility can "scare people," but it also creates pricing errors. "During the tariff turmoil last April, many people panicked. Those who sold at that time regretted it for the next year," she said. She described the current market situation as "climbing a wall of worry," and said that this type of market is often stronger. Why do algorithms "make" the volatility The "algorithm" in Wood's mouth does not make judgments based on companies' cash flow and competitive landscape, but makes mechanical adjustments to risk exposure based on rules. She summarized the recent market characteristics in one sentence: "Sell first, ask questions later." From the perspective of trading mechanisms, algorithmic strategies often trigger conditions such as price trends, volatility, correlations, and position risk budgets: When prices fall or volatility rises, the model often automatically reduces the risk asset exposure to meet established drawdown/volatility targets; Reducing positions will further increase volatility and correlations, triggering more model selling and forming a "feedback loop"; In areas with crowded funds and high homogeneity of holdings, this chain reaction is more likely to pull down "good companies" and "bad companies" together, just like she said, "throwing out the baby with the bathwater." She also touched on another amplifier: technical dominance in trading mentality is on the rise. "Now many people only do technical analysis." In her view, the more people focus on the same moving averages and the same 'key points,' the easier it is to have a stampede of same-direction trading. "Structural Transformation" that algorithms cannot understand Regarding the recent violent fluctuations in tech stocks, especially in the software sector, Wood believes that the market is undergoing a technological transformation from a "one-size-fits-all" SaaS model to a highly customized AI agent platform. In this process, the pressure on traditional SaaS is inevitable, but the market reaction has been excessive. "Anyone who sells at this moment will regret it." Wood bluntly pointed out in her video, "Most of the current volatility is generated by algorithms. Algorithms don't do the research that we do, because this is our biggest opportunity in a lifetime." She elaborated on the malfunction of this mechanism: when the market perceives a slowdown in the growth of the SaaS sector, algorithmic trading tends to execute indiscriminate selling orders. Machines cannot distinguish which companies are successful in transitioning to AI platforms and which companies will be eliminated. This mispricing due to the lack of in-depth fundamental research by algorithms is an opportunity for active investors. "This is why we concentrate our holdings on the stocks we have the highest conviction in. The market is giving us this opportunity," Wood said, indicating that the current market environment is climbing a wall of worry, which is usually a solid foundation for a strong bull market. "Tech Titans Burning Money is a Must: It's 1996, Not 1999 Now" The market is generally concerned that the aggressive capital spending of the "Tech Magnates Seven" (Mag 7) will erode cash flow, leading to some traditional investors focused on free cash flow starting to reduce their positions in recent weeks. Wood holds a completely opposite view. She recounted the history of the Internet bubble period and pointed out that the current situation is not the peak of the 1999 bubble, but more like 1996the early stage of the Internet revolution. "If you lived through the tech and telecom bubbles, the current environment is much healthier than back then." She used a vivid analogy to illustrate the health of the current market sentiment: During the peak of the Internet bubble, Jeff Bezos could say, "We will lose more money to aggressively invest," and then Amazon's stock price would rise by 10% to 15%. But today the situation is completely different. "When the 'Tech Six Giants' say they will increase capital expenditure, the market punishes them, and their stock prices fall instead of rising." Wood believes that this indicates that investors are not in an irrational boom, but rather are full of fear and skepticism. "The market is climbing a wall of worry, which is usually a solid foundation for a long-term bull market, not a prelude to a bubble burst." Today's investors have the "scar memory" left from the bubble bursting in 2000, which makes them extremely cautious when facing new technologies. "We believe Google, Meta, Microsoft, and Amazon should aggressively spend because it's our biggest opportunity in a lifetime." Wood rebuts the market's shortsightedness, "The problem is, when we evolve towards agentic AI and chatbots like Siasun Robot&Automation, will this take away time from traditional social media? From a shopping perspective, will our intelligent agents do all the work for us online? We do need to pay attention to changes in market share, but this is where the opportunity lies." Productivity Impact or Lowering Inflation Wood extends the impact of AI to the macro level: an increase in productivity may change the traditional narrative that "growth inevitably pushes up inflation." She mentioned that an increase in productivity will reduce the share of the budget deficit in GDP and stated that the US could move towards a surplus by the end of this presidential term (she gives the time frame as the end of 2028 to the beginning of 2029). She even threw out the judgment that "real global GDP growth could reach 7% to 8% by the end of this decade," and said it might even be conservative. She emphasized repeatedly a conclusion: "Growth does not equal inflation." In her framework, real growth driven by AI is more likely to push down inflation through productivity increases, rather than pushing it up. She also mentioned that if the US dollar rebounds, it will be a "strong anti-inflation force." In terms of inflation indicators, she specifically highlighted the "most important page": the Truflation real-time inflation index shows that inflation is "breaking down," with her reading being about 0.7% year-on-year. She also mentioned marginal changes in housing and energy: "Existing home price inflation has dropped to below 1%," new home price inflation remains negative, and rents are starting to decline; Oil prices are "down double digits year-on-year," which she says is equivalent to "tax cuts" for consumers and businesses. Pain in the Labor Market and Entrepreneurial Boom Regarding the current state of low consumer confidence, Wood acknowledges that consumers are "not happy," primarily due to real weakness in the labor market and the crisis of housing affordability. "Last year, the number of people employed was revised down by 861,000, which is roughly equivalent to a decrease of 75,000 jobs per month." Wood pointed out that this explains why consumer sentiment is diverging from GDP data. However, she sees a positive side in the data on the unemployment rate among young people. While the unemployment rate for the 16-24 age group surged at one point, it has now dropped to below 10%. Wood believes this is not just a recovery in employment, but could also be an "entrepreneurial explosion" empowered by AI. "AI has become so powerful that individuals can now go out and start businesses directly." Wood predicts that as AI tools become more widespread, a large number of highly efficient startups driven by individuals or small teams will emerge in the future, which will be another important engine for productivity increases. The latest video from Wood Sister is translated in full above: Opening and Market Volatility Analysis 00:01 Anyone who sells at this moment will regret it. Most of the current volatility is generated by algorithms; algorithms don't do research like we do, and this is our largest opportunity in a lifetime. Hello everyone, I am Kathy Wood, CEO and CIO of ARK Invest. This is the video update for "Employment Friday," although it's a bit forced because the employment report was actually released on Wednesday and not today. Anyway, Friday seems to be a good time to record this video. As usual, we will discuss fiscal policy, monetary policy, economic conditions, and market indicators. First, I would like to make some comments on the recent market volatility. Since its establishment in 2014, ARK has been talking about artificial intelligence (AI). We have been fully involved, especially when we first established positions in companies like Nvidia. We have done a lot of research, and I believe we have done a good job in understanding how the environment is evolving. In the temporary "In The Know" video, I described how we anticipated the shifts in market share from SaaS to PaaS. Basically, this transformation means that you need to customize platforms based on the specific needs of each company, rather than using a "one-size-fits-all" SaaS model. So, this kind of change is not surprising. However, the market, or rather investors and speculators, as usual, threw the baby out with the bathwater. So, as usual, we concentrated our holdings on the stocks we have the highest conviction in. As I mentioned, most of the current volatility is generated by algorithms, which don't do research like we dothat's why we focus our investments on the highest-conviction targets. The market is giving us this opportunity. This is our view on volatility. You may remember when there was tariff turmoil last April, and people panicked. Those who sold at that time regretted it for the rest of the year. Since then, the market has shown strong growth. I see the current market environment as "climbing a wall of worry." Markets climbing in worry often signal a strong bull market. Although volatility can be uncomfortable, it is much healthier than the environment we experienced during the tech and telecom bubbles. People may say that AI is going through a bubble, which is part of the market's concerns. But we don't see it that way. The research we have done indicates that we are in a tech or internet revolution equivalent to 1996, at a very early stage. Although it eventually entered a phase of accelerated growth and became crazy, initially, it was like 1996, an era of early development. That's why the market is full of fear and "climbing a wall of worry." Some may say that AI is experiencing a bubble, which is part of the market's concerns. However, we don't see it this way. All our research shows that we are in a period similar to 1996, and the opportunities are real. Although Alan Greenspan talked about an "irrational exuberance" during the time of tech and telecom bubbles, that frightened people because they thought he would tighten policy to curb speculation. But he actually said he wouldn't do that, and he would let the market operate on its own. Since that is what happened later, we have learned a lot of lessons. Today's market environment is full of people with "scar tissue," as they experienced the tech bubble. They now happen to be the seasoned professionals in our industry. They have the muscle memory to say, "I will protect my companies from this risk." I think this mentality is what has preserved the market's fear and that wall of worry. Market volatility can be uncomfortable. But like last April, these turbulent times are important opportunities to "trigger the next big event." We are ready for the golden era. We can see the explosion of AI and feel the ground moving beneath our feet. I can already see and hear CEOs saying, "My goodness, we have to do something about this." So, I believe the momentum will continue to build. It is most important to be on the right side of change. Thank you, and I wish you all a pleasant long weekend. This article is reproduced from "Wall Street News," GMTEight Editor: Wang Qiujia.