Thoughts on ARKK and Tech Stocks
At the start of the year, I expected a market correction around 2Q given where valuation levels were headed towards. However, the sell-off came earlier than expected in late February and that caused some large drawdowns in the portfolio, given its high exposure to tech names, including the ARKK ETF. I had predicted that the Fed would continue to keep policy accommodative for the forseeable future and that any inflationary upside surprises would likely be transitory and abate with time, given the structural headwinds that I think are still somewhat a concern, such as changing demographics, the challenge of vaccinating every person within the developing world amidst the likelihood of new variants (turns out that the Delta variant is now proving this), and the believe that pent-up demand would be short term and dependent on the confidence within the labor market and wage growth. This is especially so given the psychological scarring that the pandemic has left on millions of people who were left struggling without income, which would in turn condition them and future generations to be more thoughtful with their spending and saving habits. This could translate to multi-year underspending or at best normalized spending that isnt excessive for millions in the lower-middle income. As such, spikes in inflationary are likely to be short-lived and not sustained over the long term even as economies reopen over time. This therefore puts into question the negative market reaction towards growth stocks (particularly tech names and innovation leaders, which ARKK invests in) earlier this year when there was a significant rotation out of growth into value names. Today, we are seeing some reversal of that rotation and a rebound in the likes of ARKK, suggesting that growth stocks are resilient winners with long term upside potential given their strong fundamentals and structural tailwinds, even though valuations appear to be stretched from a technical standpoint.
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