After money manager Cathie Wood’s exchange-traded funds plunged 60% to 80% last year from their peaks of 2021, investors are focused on the outlook for 2023.
Ark Investment Management's chief executive is positively buoyant about her strategy of investing in young technology companies. These companies are involved in fields including gene sequencing, robotics, energy storage, blockchain technology and, especially, artificial intelligence.
As for the market environment, “we’re getting a lot of deflationary signals, but the Fed isn’t buying in yet,” Wood said in a year-end commentary. She was referring to the Federal Reserve’s continuing interest-rate increases.
“But the bond market will start to convince the Fed,” Wood said. “The bond market is telegraphing much lower-than-expected inflation and/or recession.” She noted that the 10-year Treasury yield has slid substantially from its October peak.
“The bond market always leads the Fed, and the bond market is speaking loudly,” Wood said.
“We are seeing a lot of deflation in the pipeline,” such as falling commodity prices and discounts at retailers, Wood said. Housing and auto prices are coming down, too.
And deflation should cause a “boom” in the disruptive innovation areas pursued by the companies in which Ark invests, Wood said.
The Stock Market Waits for the Fed
“Normally, [the stock] market would have responded already, but it’s waiting for the Fed,” she said. “First the Fed’s rhetoric will change and then its actions in 2023.”
As for why Ark hasn’t turned defensive in its investments, “we don’t pretend to be asset allocators,” Wood said. “When an individual chooses our strategy, they aren’t choosing alone. They have a more diversified portfolio. We’re one part of an investment portfolio.”
During the market downturn of the past two years, Ark has concentrated on buying the stock of “high conviction names,” she said. “History would suggest that concentrated strategy plays very well in subsequent rebounds. And we think this rebound will be quite powerful.”
Investors are “so terrified by the most rapid interest-rate increases ever that fear is palpable,” Wood said. “That’s the best time to average into these markets.”
In 2020-21, when Ark’s stocks were soaring, “we could do no wrong,” she said. “I knew that wasn’t right.” That was the time to build dry powder -- cash available for investments -- and this is the time to deploy it, she said.
Wood noted that energy was the one industry that offered big returns in the stock market last year. So why not dive into it?
“We think it will stop working,” she said. If Ark’s forecasts for electric and autonomous vehicles are correct, oil demand could drop 30% in the next five to 10 years, Wood said.
Wood Makes Comparisons to 1990s, 1920s
“This period is the flipside of the late 1990s, when there was an irrational appreciation of tech stocks,” she said. “The technologies weren’t ready, and the costs for them were too high.”
But prices have come down. “Now we’re ready for prime time,” even though many investors are running away, she said.
“This is a once in a century opportunity,” Wood said. “Innovation solves problems, and we have a lot more of them now.” That includes companies facing pressure on their profit margins and individuals worried about their jobs.
“In periods like this, businesses and consumers are willing to change, to embrace innovative solutions,” she said.
Wood sees a parallel now to the 1920s. “We haven’t seen more innovative platforms evolve at the same time ever,” Wood said. “The closest is 100 years ago, with the telephone, electricity and autos.”
Back then, inflation peaked in June 2020, launching the “roaring ‘20s,” when stocks soared. “We think we have a setup here for the roaring ‘20s, and it’s all around innovation,” Wood said.
In terms of last year’s plummet for Ark funds, “it’s darkest before the dawn,” Wood said. “Now’s a great time to invest. According to Warren Buffett and other great investors, the best time to invest is when there’s blood on the street.”
