What You Need to Know
- Deflationary forces will help keep rates low, which supports stocks, according to Wood.
- She expects most of the appreciation in equity markets “will accrue to innovation” technologies.
- In the meantime, she sees a tug of war between value and growth stocks that will resolve later this year or early next.
Cathie Wood, the CEO and chief investment officer of Ark Investment Management, says the stock market can continue to gain if long-term interest rates remain below 2%-3%.
“Too many people fear inflation, which is a multiple killer. We are not,” said Wood, in the firm’s monthly market update webinar.
Wood believes that disruptive technologies will continue to be a deflationary factor in the market, which, coupled with cyclical deflation due to lower commodity prices for lumber and copper, bodes well for stocks, especially the disruptive tech stocks Ark invests in.
According to Wood, stocks are not in a bubble and have appreciated in a v-shaped recovery as the pandemic slowed, but the bond market is, with unusually low yields. She said she is surprised by how low bond yields have fallen.
Some of the yield decline can be explained by technical factors, including banks having to disgorge themselves of Treasury bonds after the Federal Reserve decided against extending an exemption that let them exclude Treasurys and deposits with the Fed from their calculation of a key bank capital measure known as the supplementary leverage ratio.
Also contributing to the decline in yields are falling commodity prices, a jobs report showing household employment and length of workweek falling, and a decline in durable goods consumption. Wood expects overspending in services, like overspending on goods earlier this year, will lead to “significant overhangs,” and also contribute to future deflation.