ARKK - New Secular Bull Markets Hidden In Plain Sight

2024-01-14 09:57:03 ET

Summary

• The focus of KCI Research and The Contrarian is still on value and commodity sectors.
• There have been clear outperformances in certain areas of the market, such as oil & gas exploration and production, large-cap energy, and materials and mining.
• New secular bull markets are happening but are often overlooked by investors who are still focused on technology stocks and previous bull market winners.

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Travis runs KCI Research and The Contrarian - why they're still focused on value and commodities (0:25). Really long market trends. Why new bull markets could run 10+ years (3:05). This is an abridged conversation from a recent Investing Experts podcast .

Transcript

Rena Sherbill: Travis runs KCI Research on Seeking Alpha. You also run an investing group called The Contrarian .

So, looking at the market these days, is there a sector, or is there a group of stocks, or is there something that you're particularly focused on these days?

KCI Research: Our focus is still in the value arena, the commodity arena, and it's - if you go back to the heart of the pandemic, the broader equity market bottomed on March 23 of 2020.

And since then the Invesco ( QQQ ) Trust is up 143% roughly. The SPDR S&P500 ETF, ( SPY ) is up roughly 119%, but if you look at the oil & gas exploration and production ETF ( XOP ), it's up 345%. The large cap energy sector SPDR ( XLE ) is up 284%. The materials and mining ( XME ) is up 318% roughly.

So, if you look back to that point in time, which I think was a very important time for various reasons, I think you can see that the structural or secular bull markets that are ongoing today, there's been clear outperformance in certain areas of the market, and it's funny because the investor attention is still very much focused on technology stocks and the Qs were up last year. They were up almost 55%, which was a terrific year, but they had been down quite a bit the year prior.

And something like I was looking just before our call, the SPY is only up a little over 2% if you go back to January 1, 2022. So, I think there's a clear area where there's new secular bull markets that are happening kind of hidden in plain sight. And the nice thing is that investors as a whole, their focus is still really not on that arena, at times, because of the performance of certain equities or certain sectors, people will chase performance there.

But by and large, people are still focused on really, what were the bull market winners from like 2009 to 2021, which was a tremendous bull market for the broader equity market.

RS : So, would you say that retail investors are more consumed with like you just mentioned, kind of recency bias, and so you're able to capture what they're not focused on?

When do you, a) would you agree with that kind of synthesis of your strategy?And then, also, how do you know when it's about to turn? How do you know when your contrarian is encroaching more towards common approach?

KCIR : Yeah. Those are great questions. And the market trends can run really long. I just mentioned that this last bull market really ran from after the great financial crisis in March of 2009 through 2021 is what I would define it as. That's a long timeframe. And so I think the new bull markets that we're in, I think they're going to run similar timeframes 10-plus years.

So to answer the first part of your question, I think it's natural investors, and I've seen it throughout my career professionally and since I've been at Seeking Alpha, but people chase performance. It's just human nature, right?

And, I mean, it depends when you start chasing performance. If you start buying Microsoft ( MSFT ) in 2012, the free cash flow yield was 15%, and they had this huge runway ahead of it. So, if you were chasing the performance of '09, '10, '11, '12, and buying those type of stocks back then you had a lot of runway in front of you, so you didn't really want to be contrarian, going against the grain of what everybody was buying at that point.

So I like to use the saying that a good contrarian will be contrarian 20% of the time at very important inflection points and 80% of the time you really want to run with the herd.

I still think we're three years in now to what these new structural bull markets are. I don't think they'll be adopted for, it's going to take longer for investors to notice the outperformance. And because of the nature of, we often focus as investors on the calendar year returns and 2022 was just really tough for the broader equity market, but then you had this bounce back in 2023.

And people forget, like, ARK was down, the ARK Innovation ETF ( ARKK ) was down 67% in 2022, and it really topped in early 2021. ARK came back last year, and had a really good year, up 69%. But if you had owned it cumulatively, over those two years, you were still down quite a bit, so it's easy to lose focus of what is really outperforming unless you take the five or 10 year bigger picture view of what is happening.

In 2022 and 2023. I mean, in 2022, you saw interest rates move higher. And it's - if you go back, I mean, it's easy to forget because there's so much news and you forget the narrative. I always say narrative follows price.

But if you go back to December of 2021 and you looked at what the Federal Reserve was predicting, they were predicting three 25 basis point interest rate hikes in 2022. Three, so 75 basis points in total. And as we know in 2022 at various times they were raising interest rates 75 basis points per meeting not just for the whole year.

So the macro was important. Sentiment's very important, as well. But 2022 you saw interest rates across the curve really go up. It was kind of the Fed was chasing inflation and rising interest rates, particularly at the long end of the curve and the ( TLT ) was down 31% in 2022. That torpedoed the broader equity market indices.

And then last year, I mean, interest rates - TLT was only up a little bit in 2023, calendar 2023, it was up 2.4%, but it was down more during the year. And when interest rates turned around, and yields start going down, that kind of drove really, it drove the equity rally in the first part of 2023, the first-half and then in the second-half, it did as well.

So the macro is very important, particularly, how interest rates are really gravity for the other asset classes, but interest rates, what they're doing, what commodity prices are doing, then obviously what the equity market is doing. And those three main asset classes interplay and they impact each other.

Another example of that is if you go back to 2007, the market was pretty bullish because the Fed had cut rates 50 basis points and then really oil prices they took off from the latter half of 2007 into 2008, and that uptick in oil, in particular, but commodity prices, that was really ominous for what was going to happen to the broader equity markets.

So you have to pay attention I think to the macro , particularly what's happening with interest rates and commodity prices and then what their impact is on equity prices.

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