Mentioned in Video:

⚠️ #CathieWood warns investors that the market is setting up for another huge rotation and #ARKInvest will TRIPLE as a result, even though her biggest funds (#ARKK, #ARKG, #ARKW) are currently down by double-digits. Let's look at the indicators that she says will make @ARK Invest grow by 30% annually, even as the world opens back up. What do YOU think – is there really no going back?

Video Transcript:

We're not going back to the old world. We're not going back to the old world. So my confidence has only increased in our strategies. We believe that our portfolios will more than triple over the next five years, so that's more than a 25% compound annual rate of return over the next five years. Actually, it's approaching 30 after today.

Cathie Woods' conviction in ARK Invest's five year price targets has only gone up over the last few weeks. In her opinion, the market has been discounting growth stocks by 30% to 40%, which means ARK Invest's five year performance is going to skyrocket. If she's right. In this episode, we'll look at a few factors that I believe are making Cathie Wood even more bullish on innovation than usual. And then we'll ask the big question: should we really be this confident in ARK Invest? If you enjoy this type of commentary and analysis, consider liking this video and subscribing to the channel with all notifications turned on.

That way, you'll be the first to know when I come out with new research, regardless of how YouTube tunes its algorithm. Let's get right into it. ARK Invest's performance for the year is way down. But Cathie Wood's confidence is way up. What gives?

How do you keep your investors kind of energized in your philosophy and your thinking and your outlook and confident in your strategy in a moment where there's a lot of doubt out there?

What has happened is our price targets for the next five years, that's our investment time horizon, have not changed, right?

Not at all. Yeah.

In fact, some of them have gone up as quarterly results have come out. Now. They're not going to change that much because that one quarter's result is not going to change a five year price target by that much.

But the forces that the Coronavirus put in motion supporting all of the innovation in which we invest, they're not looking back. And so what we are seeing is a 30% to 40% discount to peak price in February for the same price targets. So we're looking at this saying, all right, on sale, innovation is on sale.

Okay, so that's the jumping off point. Arc Invests five year price targets are staying the same, even though the market has changed dramatically since February. In previous episodes, I pointed out that Cathie Wood has been buying up advanced Internet companies and stay at home stocks like Twilio, ticker symbol TWLO; Coinbase, ticker symbol, COIN; Twitter, DraftKings, UIPath and Skillz. You can find my deep dive into what Cathie Wood has been buying during the recent bottom for growth stocks in the top right hand corner of your screen right now and in the description below.

But aren't stay at home stocks super risky now that things are opening back up and the weather is getting better? Isn't that why people are rotating their money out of high tech growth stocks in favor of less volatile value stocks and cyclical? Shouldn't ARK Invest be doing that as well?

And oh, by the way, the bull market has broadened out. It is now embracing value and more cyclical stocks. So what has happened is the Bull market has broadened, has strengthened, and that is usually a launching pad for our next move up. This happened, if I can just say, 2016 same thing. Fourth quarter of 16 after Trump, against all expectations, was elected. Value stocks took off because we're going to have a big cycle, tax cuts, right? And our strategy went down. We were negative. But what happened was 2017 was one of our best years ever, save last year.

And that's because the bull market had broadened out included value, cyclicals were taking off and the economy was on the mend. Our economy is very strong right now, and cyclical earnings growth and revenue growth is a competition to innovation. But if we're right on what's happening with commodity prices right now and that's going to be extended, that is the ticket to the next move in our kinds of stocks.

We will get back to those commodity prices in a minute. The first bullish factor I want to cover is how spread out the bull market is really getting. Cathie Wood is saying that the bull market extending past her type of growth stocks into value stocks and cyclicals is a good thing for a few reasons. First, the economy is strong enough and people feel safe enough to buy stocks in the first place instead of focusing exclusively on other assets like their homes, stocking up on goods, bonds, and so on.

Second, the bull market being extended now means it'll narrow down in the future. Once value stocks and cyclicals are no longer providing such competitive returns, that's the launching pad Cathie Wood is talking about. People are injecting money into the market and then rotating that money back into growth stocks in the future, pushing up the prices for all the stocks that ARK Invest has been buying at these 30% to 40% discounts. But wait a minute. If things are opening back up and there's all this pent up demand to travel, shop and eat at restaurants, won't these businesses inflate prices and make it killing? That's the point of recovery stocks, isn't it?

Is inflation going to be a problem in your view?

Well, we've been saying for some time. V-shape recovery. Businesses are way behind consumers. Consumers are buying all of these goods. In fact, that's all they can do because they're stuck at home, right? So they were buying nondurable and durable goods that could be shipped to them, right? Businesses didn't expect it. They were behind even before the Coronavirus. They had been nagging in terms of capital spending, in terms of inventories, they got even further behind and still haven't caught up.

So what's happened now? Double triple ordering, maybe quadruple ordering because they just can't get the good as we've been in companies paint. And so what I believe is we are setting up for a massive period of deflation.

This is our second factor, and it's a really important call out. Inflation and rising interest rates are exactly the types of things that jam up ARK Invest's growth oriented strategy. Thinking we're setting up for a massive period of deflation is a very contrary opinion to all the headlines going on right now. If Cathie Wood is wrong about this, her performance will suffer for it. So how is Cathie Wood coming to that conclusion?

And so what I believe is we are setting up for a massive period of deflation. Now let me explain that. Now we have seen Lumber correct 30% in the last week. I think this is the beginning of that. Copper is now starting to correct. I believe that commodity prices went too far too fast as businesses were scrambling and panicking. Right? They were losing business to competition if they hadn't planned their inventories correctly.

Commodity prices like lumber and copper are another bullish factor worth talking about. Those prices spike when businesses panic buy to fill their inventories in response to a steep rise in demand from their own consumers. So businesses are double and triple ordering. But customers have already stocked up and are now switching to paying for services and experiences. That's going to lead to a lot of canceled orders for things like lumber and copper, meaning there will suddenly be a lot more supply than there is demand, deflating prices.

Remember, money isn't made when things go as expected. It's made when you see something before everyone else does. Money is made on surprises relative to expectations. Cathie Wood is using the recent fall of copper and lumber prices to point out that inflation won't hit us in the ways that most people expect. If she's right, there will be two surprises on inflation relative to expectations. The first is that it'll be a lot more narrowly focused towards services and experiences as opposed to goods. The second is that it'll be short lived, lasting from when things open back up only until these services satisfy that pent up demand, just like she points out in her most recent episode of In The Know With Cathie Wood.

A lot of the inflation is coming from transportation, hospitality, and leisure. Again, these areas of the economy are just starting to open up, and they have some pricing power. They need to recoup some of the losses from the last year, and that's what's happening. We do not believe this is going to be sustained. If we're right, there are a couple of reasons. One, businesses, I mean, this is going to be like Wiley Coyote. Businesses are scrambling, scrambling to catch up to the consumer, but the consumers left.

So Wiley Coyote's off the cliff, and I think we're going to see a pretty serious drop in commodity prices. We have already started to see some of these. Copper price peaked at $4.90 is down to roughly $4.50. We're seeing lumber prices…

You get the drift. This connection between current commodity prices, business inventories, consumer behavior and investing in stocks is the real value I get from watching In The Know With Cathie Wood. She goes into a lot of detail about all of the factors that could affect growth stocks in general and ARK's funds specifically. The special thing about this latest episode is that a lot of factors she looks at are starting to point to a big rotation into growth stocks. Oil demand and gas powered vehicle sales are down, signaling and accelerating shift to electric vehicles.

Recent talks around tax policy are getting a lot more market friendly than what was being priced into the markets earlier in the year. The ten year treasury bond yield is coming down, which is something people usually buy to protect against inflation. I'll leave a link to her latest episode in the description below, but my personal opinion on it is this: many factors that are important to ARK Invest's performance are starting to line up in their favor. Here's how they all fit together and what happens next, according to Cathie Wood.

Even with the shocks we've been through during this first half of the year, I mean, interest rates are doubling the ten year government bond yield, doubling in three months. That's never happened, never happened before. We got through that and the market was up at the end of the first quarter. Now bond yields are coming down. That's very market friendly. We had the fears of capital gains, tax rates, nearly doubling, introduced into the equation in the second quarter. And still the market continues to move forward. We believe, as we've been saying for quite some time, that the bull market is alive and well and it is broadening towards value and cyclical sectors.

Or maybe I should say it has broadened. This has happened and we thought it would and we thought it would hurt innovation oriented strategies. It has done that as well. Now, if we're right and everything I just suggested based on the evidence we're seeing occurs, then these cyclical sectors are setting up for a fall and that should accrue to the benefit of innovation.

So, let's bring the whole thing full circle. According to Cathie Wood, the whole market has been over pricing in all of these factors: interest rates and inflation and high tax rates. Even with all that downward pressure on prices, the bull market is still going strong and is very broad once services fulfill all of the pent up demand and value stocks and cyclicals cool off, this strong Bull market will focus more narrowly on growth stocks, and those stocks will rally even harder as interest, inflation and tax rates come in lower than most people expect.

Commodity prices coming down and treasury bond yields coming down and oil demand staying down are early indicators that appear to confirm the setup to Cathie Wood and she's loaded her funds up accordingly. Now, with what I think is the right context, let's look at that intro clip one more time.

What about the tech underperformance, Cathie, that we've seen? How much longer do you think we see that?

Well, you can never say when we've hit bottom. I can tell you that the valuations in our portfolios would suggest that over the next five years, again, if our research is correct, no promises. We believe that our portfolios will more than triple over the next five years, so that's more than a 25% compound annual rate of return over the next five years. Actually, it's approaching 30 after today. So I'm looking at that with great confidence because these innovation platforms have hit escape velocity and there is no turning back.

There is no turning back. We're not going back to the old world. We're not going back to the old world. So my confidence has only increased in our strategies.

Comment below with your thoughts. Do you think Cathie Wood's views on these market forces will play out in her favor? Will ARK Invest's funds see a huge rally in the second half of the year? Why or why not? I'm excited to hear your thoughts. Better information today means better investments tomorrow. So I hope this episode helped you understand some of the indicators and trends that Kathy Wood follows, how they fit together and their effects on her market outlook. If it did, let me know by investing in the like button and subscribing to the channel with all notifications turned on, that's a great way to invest in the channel

that invests in you. Until next time. This is Ticker Symbol: You. My name is Alex, reminding you that the best investment you can make is in you.

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Alex Divinsky

💰 Investing in our future through disruptive innovation, ☕ lover of coffee, 📺 host of Ticker Symbol: YOU on YouTube

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