10-year Treasury bonds, which yield 1% to 2% per year, or a U.S. large cap index-based exchange-traded fund for the next ten years.
“I really believe the Treasury bond will do well, and a lot of what people consider growth stocks right now will perform surprisingly poorly,” said Wood, who was “torn” by the question.
Wood was asked about a large-cap ETF that would include mega-cap growth stocks such as Apple, Amazon, Microsoft, Alphabet, and Facebook. There are also names like JPMorgan Chase, Johnson & Johnson, UnitedHealthcare, and Visa.
Wood believes that this disruption will lead to deflation once more, causing yields to fall further from their already historically low levels.
According to Ark Invest’s founder and CEO, more than half of the Dow Jones could be full of “value traps,” or companies that have leveraged up to buy back shares and pay dividends instead of aggressively investing in research and development to stay on top.
The Ark strategy is centered on disruptive innovation. These are the companies that Wood and her team believe will alter the global order. Tesla, Teladoc, Zoom Video, and Square are among her top holdings.
Wood rose to prominence following a successful year in 2020, when her fund returned nearly 150 percent. Her flagship fund, on the other hand, is down about 5% this year due to a harsh rotation to value stocks from growth stocks. In 2021, the Dow Jones is up 17%.
The iShares 20+ Year Treasury Bond fund, which invests in government bonds with longer maturities, is down about 4% year to date.
Not inflation, but deflation
Wood also favors bond ownership over the next decade because she believes we are entering a deflationary period. Meanwhile, most of Wall Street is terrified of inflation.
“We believe there will be a significant deflationary pull out there.” “We believe the greater risk is deflation rather than inflation,” she said.
Wood believes that since the start of the Covid-19 pandemic, consumers have spent their money on goods because services were unavailable during the lockdowns. As millions of Americans are immunized, Wood predicts that consumer spending will shift to the services sector, which accounts for two-thirds of all consumer goods.
She claims that businesses are doubling and tripling their orders right now to meet demand, and that the market will shift to services at the same time. Companies will be forced to lower their prices as a result of having too much inventory.
Wood also anticipates deflation as a result of innovation. According to Wood, costs are dropping dramatically as new technology alters the world order.
Problems for stocks on the horizon
“We’re going to have much more inflation next year,” the prominent finance professor predicted.” “When you see worse inflation, the Fed will be pressured, and that will disrupt the market, and that will be down the road.”
The Federal Reserve said on Wednesday that tapering its asset purchase program — the Covid-era stimulus put in place to boost the economy during the pandemic — may be “soon warranted.” In a press conference on Wednesday, Fed Chair Jerome Powell stated that the tapering process could be completed by the middle of next year. Then, in 2022, nearly half of the central bank’s members expect at least one rate hike.
According to Siegel, the Fed may need to act more aggressively to control inflation if necessary.
“Powell opened the door, saying that if things worsened, we would have to taper more quickly. If that happens near the end of the year, it will jolt the market, according to Siegel.
The Wharton professor also expressed concern that the Fed might go too far in addressing rising prices.
“I am concerned about an overreaction. Because I believe that much of the inflation that we will experience is already in the pipeline,” Siegel said. “The Fed is powerless to intervene. If they panic and say, “Oh my God, we’re so far behind the curve, let’s raise rates.” That’s not good. That will wreak havoc on the market and the economy.”
While Siegel anticipates inflation-related market woes in early 2022, he believes markets will have room to run in the short term.
“I think the road ahead looks clear for the next month or two,” Siegel said. “We could see a 10% increase in the market followed by a 10% drop.
Uncertainty on the stock market
Before the government shuts down on Friday, lawmakers must agree on a funding plan. While there may be a temporary funding solution, the larger issue of raising the debt ceiling may not be resolved for several weeks.
The House of Representatives is expected to vote on the $1 trillion bipartisan infrastructure bill approved by the Senate on Thursday.
However, Congress is not expected to act on the $3.5 trillion reconciliation bill, which Republicans and some Democrats oppose. Congress may also consider passing a continuing resolution to keep the government running while the debt ceiling is resolved.
“This has been a hectic week, but some of it was unavoidable, and some of it was planned. “You need to create a series of deadlines and crises to force a resolution,” said Dan Clifton, head of policy research at Strategas. “That’s just how it is.”
For the time being, stocks are ignoring the threat of a government shutdown.
Stocks are largely ignoring the possibility of a government shutdown, but the 1-month bill yield has risen above the 3-month bill yield in the Treasury bill market. The 1-month bill yielded 0.06 percent, while the 3-month bill yielded 0.03 percent.
“The [stock] market simply sees all of this uncertainty and says, ‘Wake me up when you get there.'” We’re going to concentrate on Covid, earnings, and all of that other stuff,'” Clifton explained.
According to Goldman Sachs, during previous government shutdowns dating back to 1980, the stock market has not typically made large moves. The Dow Jones lost 0.1 percent on the budget authority expiration date and gained 0.1 percent during the shutdown periods. According to Goldman, there was a 0.3 percent move on the resolution dates.
“The most recent federal shutdown in December 2018, when the Dow Jones fell 2% on the spending authority expiration date, was a notable exception. However, Goldman strategists wrote in a note that “this decline was likely driven primarily by investor concerns about Fed tightening.”
This time, the Fed is a factor.
Last week, the Fed signaled that it would be ready to exit its $120 billion monthly bond-buying program soon, in the first step toward undoing the easy policies enacted to combat the pandemic.
The Fed also released a new interest rate forecast, revealing that half of Fed officials anticipate a rate hike next year. Previously, the Fed predicted that its first rate hike would occur in 2023.
Emanuel anticipates volatility and a correction this fall, and while the market typically bottoms in the first half of October, he believes the debt ceiling debate will extend that time frame, depending on when the government runs out of money.
“The problem here — and this is also a problem when considering seasonality — you have all of these things going on at the same time,” Emanuel explained. “There is the shutdown, the debt ceiling, the infrastructure bill, and the larger spending package. At the same time — and this cannot be overlooked — this is the first time [Fed Chairman Jerome] Powell has erred on the side of hawkishness since late 2018, and it marks a significant departure.”
According to Emanuel, 5-year credit default swaps for US debt were near record lows in August but have since risen, albeit to a still low level.
“We were absolutely surprised, given all this uncertainty, at the rip back higher in the stock market at the end of last week,” Emanuel said. “In our view, given the uncertainty overhang and given this idea the Fed is telling you rates have to go higher,” Emanuel added. He anticipates that the Dow Jones will trade between 4,305 and 4,545 in the near term. On Monday, it was trading at around $4,450.
According to analysts, risks from China’s property developer Evergrande continue to loom over the market, as investors wait to see if it will meet its debt obligations in the coming month.
There is a cloud of uncertainty.
According to Clifton, the uncertainty in Washington could last for a long time, and the path to resolution is complicated. “The only way to resolve the debt ceiling is for one party to cave or for you to breach the debt ceiling. “It’s not going to be easy caving here,” he warned. Because of political brinksmanship over the debt ceiling, Standard and Poor’s took the unprecedented step of lowering the AAA rating of US debt in 2011.
U.S. sovereign debt has been downgraded, and economic growth has slowed. In comparison, the
In 2013, the macroenvironment was more favorable.”
In 2013, Goldman noted that the government was shut down for 16 days, during which the Dow Jones rose 2.4 percent.
Some of the grandstanding, according to Clifton, are the equivalent of Congressional “parlor games,” but reaching a resolution may be difficult due to the divide in opinions.
He anticipates that the bipartisan infrastructure package will be passed on Thursday. “I think that will create good-faith negotiations on the $3.5 trillion infrastructure package at the end of this week, beginning of next week,” he said.
Clifton also stated that the Senate will vote on a debt ceiling government funding bill, which will fail. The vote was scheduled for later Monday. “The Democrats must decide how they want to proceed,” Clifton said.
According to Goldman Sachs, the average shutdown has been three days, but the last four have been longer, averaging 18 days.
Prior to the shutdown, technology was the worst performing sector, with a median decline of 0.9 percent, but it rebounded by 0.4 percent in the week following the resolution, according to the bank. Communications was the best performing sector prior to previous shutdowns, up a median of 0.8 percent, but it fell 0.5 percent after the resolution.
Goldman found that energy, which was the best performer Monday with a 3.6 percent gain, fell 0.5 percent before the shutdowns and 0.8 percent after. The Dow Jones has a 0.4 percent median return in both the week before and week after the shutdowns