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ARKK Could Skyrocket If Cathie Wood And Elon Musk Are Right

While the markets worry about inflation, Cathie Wood and even Elon Musk see deflation coming. Here’s why they might be right, and how ARKK could soar as a result.

Inflation risk to the economy and the markets? How about deflation worries instead?

The possibility that consumer prices may plummet, not rise as they have in the past many months, is a major economic theme for ARK Innovation’s  (ARKK) - Get ARK Innovation ETF Report manager Cathie Wood. For a while, Ms. Wood was alone in her contrarian opinion. But a celebrity businessperson, none other than Elon Musk, has just echoed her thoughts.

Should Ms. Woods and Mr. Musk be right, certain sectors of the economy and the markets risk languishing in a deflationary economy just as much as (if not more than) if consumer prices were rising. To prevent this from happening, less aggressive monetary tightening would be recommended – something that would probably benefit ARKK.

Figure 1: ARKK Could Skyrocket If Cathie Wood And Elon Musk Are Right

Figure 1: ARKK Could Skyrocket If Cathie Wood And Elon Musk Are Right

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Inflation: the market’s bogeyman

As the chart below depicts, inflation has been running red-hot since around this time last year. Driven primarily by energy, electricity and food, consumer prices have increased YOY by as much as 9.1% in June 2022.

Figure 2: 12-month percentage change Consumer Price Index.

Figure 2: 12-month percentage change Consumer Price Index.

At a high level, this is why the stock market has been hurting as much in 2022. As consumer prices soar and the job market appears to be in a good place, interest rates have climbed from their historic lows of 2020 – enabled by the Central Bank’s monetary policy moves.

High prices and rising rates can, and usually do, spell trouble for consumer spending. Not a surprise, the consumer discretionary sector has been down a whopping 24% so far this year.

Cathie Wood’s ARK Innovation ETF has been doing much, much worse. YTD, the fund is down a painful 53%. From the February 2021 peak, the drawdown has been a disastrous 71%. Blame inflation and rising interest rates, primarily, for the 18-month long bearish run.

Cathie Wood: expect deflation instead

ARK’s manager seems to think that the inflation risk has been left in the rearview mirror. Instead, Cathie Wood believes that prices are likely to suffer downward pressure going forward, especially if the Fed continues to raise interest rates.

Her case for deflationary pressures, however, transcends monetary policy. Technology is what Ms. Wood thinks will lower the cost of doing business, thus trimming prices to the consumer as free-market competition does its trick.

Ms. Wood also cites the example of used cars, which have seen prices skyrocket since 2021. If the EV (electric vehicle) evolution plays out as she expects, demand for new cars that use the technology would overwhelm demand for used cars, which in turn would see prices sink.

Cathie points to evidence that deflation is already coming down the pipeline. She cites the sharp decrease in commodity prices seen in the past few months as leading indicators:

Tesla’s  (TSLA) - Get Tesla Inc. Report Elon Musk chimed in on Cathie Wood’s recent Twitter thread. He argued that “a major Fed hike risks deflation”, and that sinking commodity prices suggesting deflation ahead is “neither subtle nor secret”:

How ARKK could benefit

“What does any of the above have to do with ARKK?”, the reader might be asking. For starters, if Cathie Wood is right about the impact of new technology on the economy, ARK Innovation should benefit, as it invests heavily in these same technologies.

More subtly, ARKK suffers from a rising rate environment, as do nearly all high-growth stocks. Should enough people buy into Cathie’s and Elon’s arguments, especially those that make the important decisions at the Central Bank, maybe monetary tightening can be carried out with more caution.

If interest rates moderate or even dip from current levels, ARKK is likely to benefit. Merely returning to its all-time high of February 2021 means that Cathie Wood’s flagship fund can offer impressive gains of 250%. Talk about massive upside potential.

Ask Twitter

Cathie Wood and Elon Musk think that DEflation (and not INflation) is ahead due to a combination of (1) the new-tech revolution and (2) overly aggressive monetary tightening. Which are you most fearful about?

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)