- The rotation out of growth and into value stocks helped prevent another 2000-like tech bubble, Ark Invest's Cathie Wood said in a Friday note.
- Wood expects the current market environment will be favorable to the reopening trade for six more months.
- But longer-term, a period of deflation will reignite the rally in growth stocks as economic growth decelerates from its eventual post-pandemic peak.
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The ongoing post-pandemic reopening trade that has rewarded cyclical stocks over growth stocks helped prevent another 2000-like tech and telecom bubble, Ark Invest founder and chief investment officer Cathie Wood said in a Friday blog post.
Rather than the ongoing equity market rally narrowing in on the tech sector, it broadened out to value stocks that are poised to see strong earnings growth amid the economic reopening. That in turn has strengthened the current bull market, and helped prevent another tech bubble blow-up, Wood explained.
"In our view, this rotation has broadened and strengthened the bull market significantly, preventing another tech and telecom bubble and setting the stage for another leg up in innovation-based strategies," Wood said.
As energy and financial stocks have been some of the best performers year-to-date, some "stay-at-home" stocks have been cut by more than half, representing a valuation reset. But Wood fully expects these innovation-driven technology stocks to regain momentum as economic growth decelerates from its eventual post-pandemic peak.
Wood expects the current reopening trade to last for another six months, as inflation fears persist and cyclical earnings growth briefly outpaces earnings growth from tech companies. But because "inflation concerns seem to have dominated the headlines and ravaged high multiple stocks, whiffs of deflation could cause some rethinking," Wood said.
Wood expects continued technological innovation to help jumpstart a period of deflation, as autonomous driving and blockchain technologies disrupt legacy businesses and put downward pressure on prices.
"If we are correct in our assessment that the risk to the outlook is deflation, not inflation, then nominal GDP growth is likely to be much lower than expected, suggesting that scarce double-digit growth opportunities will be rewarded accordingly," Wood concluded.