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2021 has been a rough year for Cathie Wood, but Cathie now believes Ark Invest will generate an average rate of return of 35 to 40% per year over the next five years. That’s a bold claim to make, but Cathie’s conviction is backed by a multitude of factors that are all converging to provide the greatest opportunity she’s ever seen. Some individual investments that we will cover have the potential to achieve 8 to 25X returns in the next five years by Cathie’s projections.
There are numerous reasons to believe that the market will crash. The new COVID variant is spreading. China’s real estate bubble is suffering. Interest rates may increase and quantitative easing is likely going to decrease soon. Although some of these concerns have merit for the overall stock market, Cathie believes that Ark Invest related stocks are about to experience the biggest bull run in history. The short term spread between ARKK, which is the Ark Invest innovation ETF, and the S&P 500 has begun to expand over the past year. The reason for this centers around the issues I mentioned earlier. The most prominent economic concern of the list is inflation. More specifically, the impact that inflation has on interest rates and quantitative easing, which is when the Federal Reserve purchases bonds. High inflation hurts growth stocks the most because investors will want current profits rather than future profits. Fed chairman Jerome Powell recently implied that inflation is not transitory anymore, which is a sign that interest rates may increase faster than expected. Powell’s warning about inflation should have increased bond yields to adjust to new inflation expectations. This is because when inflation increases, inflation adjusted returns, also known as real returns, decrease. Therefore, bond yields must increase to keep real returns at a similar level. Essentially, the bond yield should theoretically increase if inflation expectations do as well. However, the bond market actually reacted in the opposite direction. Cathie Wood sees this market reaction as a signal that a massive crash is coming for consumer prices. Inflation has stayed longer than Cathie expected and inflation expectations are still increasing right now. The rising consumer prices are primarily spearheaded by a lack of supply, which won’t last forever. Cathie believes that consumer prices are about to crash dramatically once supply chains become overstocked with inventory. The bond market’s opposite reaction was a sign of the impending crash in prices.
Another factor impacting inflation is China. The Chinese economy is starting to slow down as real estate developers are failing to pay the interest on their debt payments. The government’s increased regulation has helped instigate the Chinese real estate crash. And when the Chinese economy crashes, commodities crash as well, which causes substantial deflation. I covered this topic in-depth in a previous video that is linked on the top right of the screen. Even if interest rates do increase, Cathie believes that consumer prices will crash so much that the Federal Reserve will have to rethink their actions.
So now you might be wondering, how would this impact Ark Invest and the stock market at large? The crash in the Ark Invest ETFs in 2021 was initiated by high inflation, but if what we talked about is true, then Ark Invest is about to experience one of the largest bull runs in history. Back in February 2021, Cathie only expected 15% annual returns, but now she sees 35-40% annual returns from here. This is because decreasing valuations equate to higher expected future returns, as long as future price targets remain the same. For instance, let’s say Cathie Wood expects Teladoc to reach $500 per share in 2026. If Teladoc dropped from $250 to $100 and the $500 price target remained the same, investors can expect a 5X return instead of a 2X return. This relationship is similar to how bond prices decrease when bond yields increase. Decreasing valuations for stocks only increase future returns if the fundamentals remain intact.
That’s right, Cathie Wood thinks Ark’s ETF is going to more than 4X in 5 years, but there are a few stocks that she believes will return even more than that.