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Cathie Wood Appears to Be Right About Inflation, Wrong About Stocks

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What You Need to Know

  • Ark Invest's CEO and CIO says inflation increases are temporary.
  • Wood maintains an unwavering faith in the disruptive technologies that underpin Ark Invest's portfolios.
  • Ark Invest's active ETFs are dramatically underperforming this year.

Ark Investment Management CEO Cathie Wood agrees with Federal Reserve Chairman Jerome Powell that the recent uptick in U.S. inflation numbers is transitory due both to year-ago comparisons when the economy was collapsing — the base effect — and to supply chain bottlenecks.

“With the exception of oil, we believe cracks in the commodity markets are becoming clear,” writes Wood in Ark Invest’s latest Weekly Innovation Newsletter. Lumber prices have fallen more than 46% over the past six weeks and copper prices have dropped 13%, writes Wood. She expects oil prices will soon follow suit, though they have continued to surge, now over $70 a barrel for West Texas Intermediate crude, near three-year highs.

The bond market seems to agree with Wood’s assessment of inflation risks. Ten-year Treasury yields are now below 1.50% after topping that level most trading sessions since early March.

Wood writes that oil prices will fall despite “significant cutbacks in energy-related capital spending, particularly if drivers in the ride-sharing space take advantage of the lower total cost of EV ownership.”

Unwavering Faith in Disruptive Technologies

Wood’s faith inthe disruptive technologies like electric vehicles underpins the investments in all of Ark’s actively managed ETFs, but those funds — all awarded five stars from Morningstar — have fallen sharply from their elevated heights.

Three of the firm’s six actively managed ETFs have lost money so far this year; two are up slightly and its newest, the Ark Space Exploration ETF (ARKX), is little changed from its debut price on March 30. Moreover, four of the firm’s active ETFs — which excludes ARKX — are stuck in the lowest quartile of its Morningstar category for performance.

In a late May market commentary, Wood extolled the “five innovation platforms” that underpin Ark Invest’s research and investments — DNA sequencing, robotics, energy storage, artificial intelligence and blockchain technology — and the 14 technologies that enable those platforms, but she noted the 30%-40% average decline in such stocks over the previous three months.

Wood said the firm’s long-term earnings projections for companies associated with the 14 technologies — the firm invests with a 5- to 10-year time horizon — remains intact.

“The coronavirus crisis transformed the world significantly and permanently, suggesting that stay-at-home and other innovation-driven stocks will regain momentum,” wrote Wood.

She expects the rotation from growth to value stocks, which was inspired by the economy’s V-shaped recovery and has underpinned the stock market rally this year, will unwind in the second half  “given the extreme volatility in equity, fixed income and commodity markets” and growth stocks will resume market leadership.

“The rotation back to growth is probably close at hand,” Wood said during an Ark Invest webinar on June 8.

CNBC’s Jim Cramer said last week that the “Ark Invest phenomenon is no longer in play.”

Pictured: Ark Invest CEO Cathie Wood (Photo: Courtesy of Ark Invest)