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Ark's Cathie Wood: Inflation Isn't the Biggest Market Threat

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What You Need to Know

  • The Ark Investment CEO and CIO expects 3%-4% CPI growth in the near future but not 1970s-style inflation.
  • Wood remains confident about the tech sector despite the beating that stocks in Ark's key fund have taken of late.
  • Amazon faces an uphill climb to become a major player in the health care sector, Wood says.

Despite the beating that Cathie Wood’s flagship fund of technology stocks has taken this month, the Ark Investment Management CEO and chief investment officer remains confident about the sector and worries more about deflation than inflation, she said Tuesday.

On Tuesday, shares of her firm’s flagship exchange-traded fund, the ARK Innovation ETF (ARKK), closed at $160.12, up 2% on the day but down sharply from its high in February of nearly $160. Assets dropped under $20 billion to their lowest level since January, Bloomberg reported. Tesla, the fund’s biggest holding, was among the stocks that were underperforming.

Ark’s “long-term performance is going to be determined importantly by what we do in down markets,” Wood said Tuesday during the company’s monthly update webinar. The company’s strategy has been successful “since we started the firm and, in my career, I have followed the same strategy,” she noted.

Pointing specifically to Tesla, she said the “slowdown” in sales of Tesla vehicles in China is “being offset by a ramp in the exports to Europe.”

Although “China wants to support its local players,” it also wants to “move upscale in terms of the goods that it exports,” she said, calling Tesla a great example of that, noting shipments of their vehicles from China to Europe are significantly picking up.

There are, meanwhile, “pretty phenomenal” opportunities in the market in general, she said before making several predictions.

Inflation vs. Deflation Predictions

Wood predicted that inflation as measured by the Consumer Price Index would “move into the 3% to 4% range” on a year-over-year basis over the next few months, while Producer Price Index (PPI) inflation would “move into the 6% to 8%” range or maybe a little higher.

Since the COVID-19 pandemic started, “prices have collapsed” on oil and we also face “supply chain problems” behind a “massive increase in demand” for goods, she said. However, she predicted that would only be a temporary problem.

Wood experienced the “last big wave” of inflation in the late 1970s and early 1980s, when it went “well into the double digits,” she noted. “So I know inflation. I’ve seen inflation and I do not believe the inflation genie is out of the bottle” now, she said.

There are understandably concerns about inflation because monetary and fiscal policies in the U.S. and much of the rest of the world “seem unhinged,” she said. After all, “there is a natural fear about how we’re going to pay for the massive stimulus that has been in place pretty much since the great financial crisis” of 2008 and 2009.

Yet “inflation has not been a problem” since that time, she pointed out.

On the other hand, if the value of the U.S. dollar were to “break down, then we’ll have to revisit our thoughts on inflation,” she conceded.

Meanwhile, “the odds of deflation have actually gone up,” she said. But it’s “innovation-based deflation,” which is “very good deflation” that is tied to strong unit growth, she noted.

On the other hand, bad deflation has started, associated with companies whose products will likely become obsolete or who went out of their way to satisfy short-term-oriented investors. For example, automakers are “scrambling” to innovate with electric cars, she said, predicting some of them will not survive.

She also predicted that “we’re going to face a third source of deflation within the next year” and that will be “cyclical deflation.” There will be a “very serious correction in commodity prices” later this year and into 2022 “as the shift towards services evolves” and consumers start consuming more services again after being vaccinated against COVID-19, she said.

Interest Rates Prediction

Wood went on to tackle the question of whether higher interest rates would continue to crush growth stocks.

The bond market “had a heart attack” in the first quarter of this year as banks “disgorged their Treasury bonds,” Wood said, noting “we’ve never seen rates double in a three-month period” before.

Since March 31, interest rates have come down somewhat, she said, predicting low interest rates will not be sustained. However, she predicted they will be “sustained at a much lower rate” than many others have projected — “probably in the 2% to 3% range” — or maybe 1.5% to 3%, if her firm proves to be correct on the sources of deflation “brewing out there.”

Equity Bull Market Predictions

Addressing the third question of the presentation — on whether the equity bull market is at risk — she said: “This is not how a bull market ends.”

There has been a “wall of worry” building throughout the past year and since her firm was founded in 2014, she said, adding it’s “a good thing” that investors are worried now and can strengthen the bull market.

She predicted that digital wallets and decentralized finance in the cryptocurrency space are “going to transform financial services and hollow out many, many financial services sectors.”

Some market analysts have predicted that the past three months have portended the equivalent of the “tech and telecom bust” that lasted almost three years. However, “we do not believe that’s the case in the least,” she said.

That is because “the kind of growth that we’re going to see coming out of these technologies … is going to be astonishing,” she predicted.

During the Q&A, she also predicted “Amazon has a long row to hoe before it will make a dent in” the very challenging health care sector.

(Photo courtesy of ARK Invest)