In response to a V-shaped recovery, global equity markets rotated away from growth stocks toward value stocks during the last nine months. As a result, commodity prices soared, increasing fears of inflation and higher interest rates. At the same time, the earnings growth of cyclically sensitive companies offered stiff competition to that of growth companies, given the short-term time horizons of most investors in the public equity markets. Dramatizing these dynamics, during the three months ended March, the 10-year US Treasury bond yield doubled to 1.74%, one record-breaking increase for such a short period.

While others extrapolated those trends into the future, ARK has maintained that inflation would prove temporary thanks to the base effects caused by the price collapses last year and supply chain bottlenecks that will cause double- and triple-ordering supplies, a massive inventory overhang, and a commodity price collapse. Except for oil, we believe cracks in the commodity markets are becoming clear. During the past six weeks, lumber prices have dropped more than 46% from $1,686 to $897.90 per thousand board feet, while copper prices have dropped roughly 12.78% from $4.77 per pound to $4.16.2. We believe oil prices will not be far behind, despite the significant cutbacks in energy-related capital spending, particularly if drivers in the ride-sharing space take advantage of the lower total cost of EV ownership.

In our view, exacerbating the cyclical deflation will be two secular sources of deflation, one good for economic activity and another bad. Please read our latest market commentary (published on May 21st) or view our latest YouTube update (published on June 4th) to learn more about our thoughts.

[1] Source: Bloomberg

[2] Source: Bloomberg. Information as of 6/18/21