Inflation is still here, but there are some indications that the reflation trade is encountering headwinds. Those factors and more could propel disruptive growth strategies back into the spotlight.
Consider the following. Over the past month, the ARK Innovation ETF (NYSEArca: ARKK), the benchmark for disruptive growth exchange traded funds, is higher by 9%. That’s not a coincidence. Over the same period, the Invesco DB US Dollar Bullish (NYSEArca: UUP), which tracks the greenback against a group of major currencies, is up 2.48%.
A stronger dollar often mutes inflation expectations – an important near-term point because inflation is widely expected to be transitory. Additionally, a sturdier greenback can weigh on some of the sectors that are leading the cyclical value rally, such as energy and materials.
“This dollar strength has moderated and put downward pressure on inflation expectations,” said Oppenheimer Head of Technical analysis Ari Wald in an interview with CNBC. “This has pressured value-related inflationary trades like energy and in turn given investors the green light to get back into growth stocks.”
Possible Paths for 10-Year Yields
ARKK is sporting a modest year-to-date loss, a sharp improvement from the double-digit decline it was saddled with as recently as May.
While there’s work to be done to reclaim previous highs, ARKK could have some tailwinds in addition to a waning reflation trade. The fund could benefit mightily from declining 10-year Treasury yields, which some market observers believe are a foregone conclusion.
In a recent note to clients, Societe Generale strategist Albert Edwards said that with 10-year yields recently breaching the 1.30% level, there’s significant downside potential ahead.
“The long bull market looks entirely intact and with yields falling below 1.3%, a critical technical hurdle has been jumped,” he said. “A chartist would look at this chart (10-year yield) and say that the 0.5% low now beckons.”
A sharp decline in 10-year yields could be a boon for ARKK and other disruptive growth strategies for multiple reasons. First, growth companies have longer duration cash flows, meaning they’re inversely correlated to rising rates. Second, rising Treasury yields are the primary catalyst behind the strength in financial services stocks.
That sector is usually one of the largest allocations in value funds. If 10-year yields sharply decline, investors could be compelled to ditch that group, trim value exposure, and head back to growth funds like ARKK.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.