The tech and innovation bubble has burst

There is no question about it. A proxy for this bubble, the Ark Innovation fund has declined almost 60% from its all-time high of just one year ago. Does this mean it’s curtains for the secular bull market?  I think it is unlikely simply because the degree of exuberance seen in the tech/innovation sector did not bleed over to other sectors of the market. Different iterations of the virus, inflation, Fed worries, and, now, the Russo-Ukraine situation have kept a lid on exuberance. Add to that investor sentiment that has been muted for months. The AAII survey just reported bullish sentiment at the 29th lowest level for its 45-year history.  According to the survey bullish sentiment has been unusually low for the past six weeks and below average for the past 13 weeks. I would suggest that this is not how secular bull markets end with the S&P (down only 9.7% from its peak), a strong economy with good job creation, and an accommodative  Fed (yes, I said accommodative regardless of the rhetoric). I maintain that despite this, even when tech and meme stocks were strong a year ago, there was never the sense of euphoria that you would normally find at a secular top. The header and paragraph below come from a piece I wrote last May. I believe it to be an accurate description of what was going on then and what has happened since.

Cathie Wood For the Defense

Cathie Wood is a genius investor who took a simple concept of investing in growth, especially innovation, to create a vast actively managed ETF group, ARK Funds. By charter she must invest in companies possessing these qualities of growth and innovation. She hit a seam in the market where her concept jibed with a trend in place that favored big cap high quality growth and built upon it with her innovation theme. Covid 19 came along drawing even more money away from old-economy stocks into that which was new and sleek. She hit the ball out of the park. Last year (2020) her big fund, the Ark Innovation ETF (ARKK), turned in a whopping 159% return. In the stock market, as in nature, ‘no tree grows to the sky’. It appears to be time for ‘big tech'(Armani, style and fashion) to rest and the ‘old economy’ (Old Navy)to shine. Unfortunately, Ms. Wood is trapped in Armani. She is constantly forced to defend her style IN A MARKET THAT APPEARS TO BE MOVING IN A DIFFERENT DIRECTION as this clip from Friday (May7, 2021) shows:”Cathie Wood loves the setup for her stocks after sell-off…” Innovation Fund lost more than 9% last week. She is now promoting the notion her that Innovation fund might return 25% to 30% from its current level in 2021 (about $110 at that time).  (excerpt from Kort Session–Leaping to the wrong conclusion, May 5, 2021)

It appears that her prognostication regarding her 2021 fund performance was not to be. Even worse, Ark Innovation Fund (ARKK) closed last Friday, February 18, 2022, at $64.80, down almost 60% from its February 16, 2021 all-time-high of $159.70. 

Unfortunately for Ms. Wood she never made valuation (what you pay for that growth and innovation) a part of her calculus. As the fund sank and individual components collapsed she continued to recommend purchase of the names. Just one example would be ZOOM (ZM) from nearly $500 in November of 2020 to $125 today. She reiterated her buy recommendation at $300, $200 and again Friday with the stock at $130. With less-than-stellar credibility, she continues to recommend her favorite names and CNBC continues to feature her comments as they have continually throughout her entire downward spiral.

“Cathie Wood says her innovation stocks are ‘way undervalued’ and recent fund losses temporary.” They have become more undervalued since this story was published.

Words of wisdom from Morgan Stanley

“Morgan Stanley says we are in a bear market … ” Mike Wilson, Morgan Stanley’s chief investment strategist, has been a bear for a long time and he has been wrong. Now Wilson appears to have cut to the chase. He is no longer predicting a bear market but rather saying we are in one (based on certain technical indicators?). The only thing missing here is the most recent definition of a bear market that I’ve seen, a 20% drop in any of the popular indices that has not happened yet (as of close 2/18/22 –S&P 500 … -9.7%, Nasdaq … -16.4%  or  Dow …  -5% –from their all-time highs).

Let me finish with a comment from MS auto guru, Adam Jonas: “It’s unlikely you’ll profit off of GM and Ford this year, says Morgan Stanley’s Adam Jonas”

In a market that appears to be moving to value stocks Jonas implies that you would be better off owning innovator Tesla with a 174 multiple on trailing 12-month earnings and selling at 16 times trailing 12-month revenues than owning legacy automaker Ford, selling at 4 X TTM earnings and 52% of TTM revenues. His main concern is about the amount of time and money it will take for a company like Ford to become a world-class competitor to Tesla and the execution risk in getting there. As Ford has stopped taking orders on its new F150 all electric pick up and Consumer Reports just naming the Ford Mustang Mach-E as top EV pick for 2022 Question the wisdom of these comments

More importantly, why are their thoughts and the current pronouncements headline material? Why are they constantly trotted out as value sources by the media? They produce good clickbait.

Parting thoughts

The bull lives! The game has changed … embrace it! As always, the media is not your friend in this process.

What do you think?