'Not In A Crisis': ARK Invest Recaps Recovery, Reasons Optimistic Perspective

In light of the earnings cycle, in which traditional S&P 500 and innovation-driven Nasdaq companies have beaten estimates at a higher pace than usual, broad-market equity indices recovered most of their losses, and are now about flat on the year, except for the Nasdaq.

Despite the blow-out earnings cycle, indices are showing signs of exhaustion, evidenced by the uninspiring upside participation.

In a recent conversation with investors and subscribers, ARK Invest CEO and CIO Catherine Wood laid out why she believes there may be room for further upside based on a detailed analysis of fiscal and monetary policy, market signals, economic indicators and innovation.

Exponential Growth Trends Mend Fiscal Problems

On Aug. 8 after stimulus talks with Democratic leaders fell apart, President Trump signed executive actions providing economic relief from the coronavirus pandemic.

Though the stimulus helped investors regain confidence in markets, bigger concerns loom, such as the dollar’s break-down.

“The dollar does seem to be breaking down, which is good for foreign markets,” Wood said. “That’s a clue that our monetary easing is being transmitted to the rest of the world, so that’s good. But, it also could be an indicator that inflation is brewing.”

Another reason the dollar may be sliding is terms of trade.

“It could be that the dollar is beginning to fear that we are going into a higher tax, higher regulations regime in order to, in the case of taxes, pay off the gaping deficits this crisis has caused.”

Wood proposed rapid growth as a solution to the deficit crisis.

“We hope that whoever, whatever the regime is after the U.S. election will air on the side of trying to stimulate growth through capital friendly policies, as opposed to attacking growth with capital unfriendly policies,” she said. “Growth can heal a lot of sins.”

See Also: 4 Reasons There's A Disconnect Between The Red Hot Stock Market And Ice Cold Economy

Logistics Market Breaks Out, Points To V-Shape Recovery

Logistics companies broke out to the upside recently, after United Parcel Service Inc UPS reported surprise earnings growth.

“We’re getting other numbers from Amazon and other online players which are suggesting that the sales were so much stronger than most analysts expected,” Wood noted.

“Usually, the freight and logistics market is a leading indicator for the market as a whole and usually is associated with a v-shaped recovery.”

‘Caution And Fear’: VIX Remains Elevated Despite Rising Market

In a separate note, Wood tempered expectations by pointing to the value space, which has struggled to keep up with the disruptive innovators leading the Nasdaq on a record run.

“This is a subdued market. We have recovered from the shock, but there have been a lot of sectors not really participating that much on the upside,” she added. “Another interesting market signal is the VIX.”

The VIX is a measure of volatility based on S&P 500 index options. The index rose to a high in March but failed to retrace the lows.

“Right now, we’re not at the lows, which would be around 10, we’re at 25,” Wood said. “25, by using history as our guide, is quite a high level, and some of the innovation spaces upon which we focus seem to have been a beneficiary of volatility on the upside.”

“We have not seen this since the 90s … as the internet bubble was reaching all-time highs and getting ready to burst. We do not think we’re in any kind of bubble right now. In fact, if anything, I see a lot of caution and fear.”

Consumer Spending, Business Inventories Unmatched

Since the historic selloff in February and March, increased consumer spending and business inventory liquidations have failed to drum up an uptick in the velocity of money.

The reason: the savings rate or portion of money households do not spend, has risen, with consumers stashing away an additional $916 billion of their income above pre-COVID levels, according to Moody’s Analytics.

Wood identifies record inventory liquidations and rising spending as another stimulant to an eventual v-shaped recovery.

“I think the far more powerful message here is inventories have been drawn down to such a low level that if businesses don’t crank up, they’re going to lose to the competition,” she said. “So, businesses are far behind consumers and consumer confidence indicators are suggesting that confidence is continuing to move up.”

Important to note is also the increase in home and auto sales, as well as the emergence of social commerce.

“There is some social element now taking place along with shopping,” Wood noted. “We’re seeing the social networks themselves, with in-app stores, creating more commerce opportunities for consumers, and making it a more social experience.”

“We believe that innovation is an exciting way to get out of the mess we’re in from a fiscal policy point of view,” she added.