Update: ARKK 2022 vs NASDAQ 2000

By admin_45 in Blog

Today we have an update on our comparison of Cathie Wood’s widely followed ARK Innovation ETF (ARKK) to the NASDAQ in the early 2000s. We use ARKK as a general benchmark for speculative tech names. For example, here are ARKK’s current top 10 holdings to give you an idea of the types of public companies it usually owns:

• Tesla (TSLA, 9.8 pct weight): Electric car company
• Teledoc (TDOC, 7.1 pct): Virtual healthcare services
• Roku (ROKU, 6.5 pct): Streaming platform
• Zoom Video Communications (ZM, 6.4 pct): Video communication platform
• Coinbase (COIN, 5.7 pct): Financial technology/virtual currencies
• Exact Sciences (EXAS, 5.7 pct): Cancer screening and diagnostics
• Block (SQ, 4.7 pct): Digital payments
• Unity Software (U, 4.6 pct): Video game software development
• Twilio (TWLO, 4.1 pct): Cloud communications platform
• UiPath (PATH, 4.0 pct): Enterprise automation software

Although many spicy and less- or un-profitable tech stocks – including some in the list above – rallied during year one of the pandemic, their decline over the last year are often likened to the bursting of the 1990s dot com bubble. Therefore, we compared the performance of ARKK since its all-time high last year on February 12th to the same timeframe for the NASDAQ following its peak on March 10th, 2000.

Here's what we found:

• When we first did this analysis last month on the 1-year anniversary of ARKK’s record high, we found that ARKK was broadly tracking the NASDAQ’s 2000/early 2001 experience.
  
  On the 253rd trading day from ARKK’s all-time high (1 calendar year) and on the same day in 2001 the NASDAQ was down 60 percent from its dot-com bubble peak. Similarly, ARKK declined by 54 pct from February 12th, 2021.
• We said that if the 2000/2001 analog continued, we could expect ARKK to keep trending lower over the next three weeks because the NASDAQ dropped 18.7 pct over the following 16 trading days from day 253 in 2001.
  
  It’s been 15 trading days since, and ARKK has fallen by 18 pct versus 17 pct for the NASDAQ in the comparable 2001 period.
• Today marks the 268th trading day from ARKK’s all-time high and on the same day in 2001 the NASDAQ was down 67 pct from its dot-com bubble peak. As of today’s close, ARKK is down 63 pct from February 12th, 2021.
• Back in 2001 the NASDAQ got some reprieve by hitting a near-term bottom on day 269 (tomorrow for ARKK), and gained 41 pct over the following 33 trading days (about a month and a half). As for what sparked this impressive bear market rally, better-than-expected earnings results/guidance by some public companies and a surprise rate cut by the Fed gave investors more confidence about a recovery in corporate profits.
  
  The Nasdaq then rolled over, however, falling by 38 pct over the subsequent 81 trading days (4 months) to its lowest level in 2001. The US economy continued to slow and consumer demand weakened, which fueled concerns about corporate profitability. That marked the 383rd trading day from the NASDAQ’s peak on March 10th, 2000, or roughly a year and a half later. This low also came about a week and a half after the 9/11 terror attacks before the NASDAQ rallied into year-end.
• The NASDAQ’s early 2000s trough was not until October 9th, 2002, or a little over two and a half years from its March 2000 peak.

Here’s what we make of this data:

#1: Speculative tech names have been under intense pressure for over a year and whether that continues depends in part on the FOMC meeting next week. ARKK’s performance since its peak last year has generally followed the same downward path as the NASDAQ in the early 2000s, which is the best-known historical analog to the end of a speculative tech bubble. The NASDAQ’s experience says spec tech stocks should get a near-term bounce. The key difference, however, is that back then the NASDAQ benefited from an earlier than expected interest rate cut. By contrast, Fed Funds Futures give 96 pct odds of a rate hike next week, and are discounting 5 to 7 rate increases this year. Believing ARKK can stage a near-term rally from here is essentially a call on a more dovish Fed (and dot plot) next week.

#2: The NASDAQ’s 2000 – 2002 selloff started with weakening tech industry fundamentals but then grew more macro event-driven towards the end of 2001 and in 2002, which is clearly a cautionary tale for today given recent geopolitical events. For example, the NASDAQ’s 2001 trough came after the 9/11 terror attacks, and it did not bottom until October 2002 going into Gulf War II. Since speculative tech has a beta of +1.0 and correlations go to 1 during volatile periods, the selloff of these types of names has been exacerbated by the Russia-Ukraine conflict as we warned. For example, ARKK is down 14.2 pct over the last 5 trading days, while the S&P is down only 3.2 pct over that timeframe.

#3: History says the spec tech selloff still has a long way to go using the NASDAQ’s early 2000s experience as a playbook. After the NASDAQ declined by 67 percent from its peak in March 2000 through the comparable date to today, it then fell another 33 pct to its trough on October 9th, 2002. That was largely due to geopolitical events, such as the 9/11 terror attacks and Gulf War II. While it’s not directly comparable to today, higher energy prices from the Russia-Ukraine conflict and tighter monetary policy this year both pose risks to the current US economic expansion. These uncertainties are especially unfavorable to spec tech names.