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Ark Invest is down over 50 percent from its highs in 2021, leading many investors to sell the fund. Ark’s flagship ETF, ARKK has gone from managing over $27 billion at its peak to $12 billion today. The tides have turned and now that prices have dropped substantially, investors are scared to even touch any of Ark’s ETFs, and many are shorting them. This is counterintuitive, because lower prices usually equate to higher future expected returns. The CEO of Ark Invest, Cathie Wood, believes we’re at a price point that is offering one of the biggest opportunities in the history of the entire stock market.
A lot of investors liken Ark Invest to internet stocks in the dot-com bubble, but Cathie believes that skeptics are completely missing the mark. Our current situation is similar to the dot-com bubble, but the roles are completely reversed. Internet stocks soared during the dot-com bubble whereas value stocks crashed substantially in comparison. After the dot-com bubble, value stocks rallied in relation to growth stocks. Cathie Wood believes we’re in a similar situation but the roles are reversed. She sees 2022’s innovative stocks as the value stocks during the dot-com bubble and 2022’s value stocks as the internet stocks in 1999. That might sound crazy, but the performance spread between the two funds is actually quite similar. Over the past year, ARKK is down roughly 50% whereas Berkshire Hathaway is up over 30%
Price movements are intriguing to analyze, but what goes down does not necessarily have to rebound. That being said, the macroeconomic backdrop is setting the stage for a massive rally in Ark Invest. Everyone knows that the Federal Reserve is going to raise interest rates as soon as March of this year.
Most economists believe that a 25 basis point rate hike, or a 0.25% increase, will occur in March, but some actually think that a further rate hike will occur. Traders are currently pricing in a 30% chance for a 50 basis point rate hike or a 0.5% rate increase. This is because the latest job report came in much higher than expected. Economists expected 150,000 new jobs in January 2022 but the US ended up adding 467,000 jobs instead. That is a substantial difference and is signaling that the economy is strong right now. The unemployment rate has also remained quite low at 4%. Fed chair Jerome Powell recently explained how he believes there’s a lot of leeway to raise rates while the economy remains robust. All of the economists and institutions are now attempting to one-up each other into predicting higher and higher rate hikes. Bank of America recently stated that it sees seven rate hikes coming in 2022. One rate hike is typically 25 basis points or 0.25%, so seven 25 basis point rate hikes would be a 1.75% increase. That is a very bold take among banks and economists. Bank of America cited the Fed’s statement that it’s behind the curve on raising rates as a sign of further pain to come. The coming rate increase in March and the fear of future rate increases are starting to be priced into Ark’s valuations. If and when inflation cools down in response to these types of rate hikes, growth stocks will be in a fantastic position to rally. The question is how many rate hikes will be necessary to combat inflation. Cathie believes that the fear of rate increases is exaggerated and that not many rate increases will be necessary to slow down inflation. Other economic factors that we’ll soon cover are also at play and will influence the Fed’s actions.
If Cathie is right about the Fed not having to raise rates as much as people think, then Ark will experience a serious valuation readjustment on the upside. If the Fed raises rates by 50 basis points in March, that would be an incredible opportunity to purchase innovative stocks. This is because the future outlook would be positive for Ark Invest as future rate increases may not be necessary. Going back to the previous dot-com analogy that Cathie mentioned, value stocks have continued to increase month after month. Even after the latest sell off, Ford stock is still trading at a 5 year high. Financial and energy stocks have also been rallying over the past year. The vanguard financials index fund is up 28% in the past year and the vanguard energy fund is up 52%. Such increases are obviously not sustainable for slow growing stocks.