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Ark's Cathie Wood: Stocks Could Climb Further if Rates Stay Low

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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.

Ark’s ETFs were hit hard in mid-February to mid-May as the stock market rotated from growth stocks to value. They’ve recovered from their lows, but all five disruptive technology ETFs are trailing the year-to-date gains in the S&P 500, up 16.3%, and the Nasdaq, up almost 14%.

Performance in its ETFs year-to-date through July 13 range from a 7.4% decline in ARK Genomic Revolution ETF (ARKG) to an 8.1% gain for the Ark Autonomous Technologies & Robotics ETF (ARKQ). The rest of Ark’s ETFs recorded slight losses or low- to mid-single-digit gains.

“Growth stocks were penalized” earlier this year but that is changing, according to Wood. She expects most of the appreciation in equity markets “will accrue to innovation” technologies in which Ark ETFs invest. The capitalization of transformative technologies in the public markets has exploded from about $7 trillion to $14 trillion in 2020 and will grow to $75 trillion or more in the next five to 10 years, according to Wood.

In the meantime, she sees “a little bit of a tug of war [between growth and value] that … will resolve near the end of this year or into next year on the side of innovation mostly because of deflationary forces … which puts a lot of value groups in harm’s way,” said Wood.

In response to questions about the outlook for large Chinese tech firms in light of a government crackdown on Chinese stocks listed in the U.S., Wood said there was a “valuation reset” for those stocks. “their prices have come down [and] .. from a valuation point of view probably will remain down.”