Yesterday was really, really weird. I'm standing there rattling off stats about how poorly Cathie Woods' ARK ETF is doing--her widely followed ARK-K innovation fund was down for the tenth day out of eleven--and in the next breath talking about how the 10-year yield had just slid below 1.3%.
That's not what's supposed to be happening. Everyone would say that the biggest risk to tech and growth stocks is rising interest rates. Just look at what happened in the first quarter; as GDP roared and interest rates climbed, shares of ARK-K slumped from $156 to sub-$100 on May 13th. Then, as rates suddenly reversed lower and the inflation trade collapsed, they staged a big comeback to $130 by late June.
July has been a different story. The ARK ETF has slid back to $116, while the 10-year yield has also declined, from nearly 1.5% to sub-1.3% yesterday.
So what gives? Strategist Michael Darda says the drop in the 10-year this time is not because the macro outlook is worsening, even though plenty are warning about an economic slowdown. He says since March, the term premium--the extra yield for holding long-term instead of shorter-term securities--has instead plunged by 0.6 points.
And that points to a very different macro landscape; it fits with "ongoing tight credit risk spreads, firm metals prices, and strong economic growth," he writes. And indeed, just yesterday on Power Lunch we talked about how jobless claims fell to a new cycle low, and junk bond yields have slid below the inflation rate for the first time.
In other words, it's almost as if the cyclical trade is back on, just without the inflation spikes and rising interest rates (at least so far) this time. Sure enough, although rates are down substantially this month, the financials are actually higher, as measured by the IYG ETF. The XLB materials ETF is roughly flat, whereas in a growth scare you'd expect it to be tanking. And even the energy trade--the biggest winner from the strong GDP/rising inflation trade of early 2021--now looks to be rolling over. The XLE ETF is down almost 10% already this month.
So, could we be in a new paradigm now--a strong growth but without intensifying inflation phase? Cyclicals rise, inflation trades stall out, and the "scarce growth" trades like ARK-K aren't clicking. It obviously carries plenty of risks still for investors who are wrongly positioned, but talk about a goldilocks outcome--if it lasts--for the U.S. economy.
See you at 1 p.m!