Innovation is evolving. So, quickly we have to just listen and look at the tone changes that take place from one conversation to the next to understand how rapidly the world is going to change. We know that innovation in the equity markets is the public equity markets, not the private. Equity markets have been ravaged in the last year. It’s been about a year that it has been ravaged and Кaul mentioned that when there is a change in expectations and last year, as we were getting our vaccinations the thought that the economy would open up and interest rates would go up, inflation would go up, but would be tamed.
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During the year there was a change. The supply chain issues did not go away and so this fear about what inflation and interest rates are going to do has gripped the market. First, it gripped the innovation space almost exclusively in a puzzling way now. It seems to be affecting the market a little more broadly but I will say now that the two-year treasury and the and the market itself have priced in. At least four interest rate hikes show that this possibility is priced in the equity markets too increasingly. And if anything oil prices going up is an incredibly burdensome tax on the lowest socioeconomic demographic sectors in our economy. So, I think the fears here are going to shift from rising interest rates and higher inflation potentially to recession especially. You’ve heard me on this before because we see inventories piling up throughout the ecosystem. So, innovation stocks in the public equity markets are down.
I’m going to say broadly 50 to 75 percent in the last year. I mean that is that’s as bad as it got during 0.809 now in the private markets, of course. We’re seeing one example after another where the pricing is up in the last year. We’re seeing up 50 to 100 percent and I think the private markets do have it more. They’re more correct in terms of what they should be discounting right now because of what you heard today about researching how profound the changes are, and how exponential the growth will be. And how the equity market cap is going to explode in these areas. We really do believe that will be the case besides interest rates and inflation. There’s been a double whammy in the public equity markets. I think this is what helps explain what’s going on the move to risk off for many traditional asset managers means get back to your benchmarks. If you look at the broad-based benchmarks even the broad-based tech benchmarks or tech-oriented benchmarks, you’re going to see that they are short innovation true innovation. They’re mostly in that the innovation that they’re capturing is mostly in the mega cap tech stocks. They’ve become a disproportionate weight in in many indices and I would submit in many assets I mean portfolios in the traditional asset management world this move to benchmark style investing. We believe has been turbocharged during the last 20 years by the Tekken telecom bust first and then the 0.809 meltdown and the risk aversion in the markets is palpable.
So, going back to benchmarks or repositioning portfolios, so they are closer to their benchmarks seems to be what has been going on what happens. Then, well, they’re selling the real innovation stocks out there. The emerging innovation stocks and those are going to create the outcomes that that we showed you in our research. Today traditional research is becoming very benchmark sensitive as well. It’s not just the portfolio managers, it’s their analysts and they have also become very short term in their time horizons and I do want to talk a little bit about volatility here.
Volatility has become the watchword and as Brett said in his opening remarks. Many people associate volatility with risk volatility is more associated with uncertainty and when time horizons collapse as they have within the last year. Then the volatility does increase, we use volatility to our advantage. We concentrate on our highest conviction names and that tends to work out very well. As we go through these corrections I will say as we go through these corrections and in terms of the way. We are being covered in the market. There is there are some unfortunate instances where journalists are using are using endpoint sensitivities. And they’re kind of random the time periods, they’re using I guess I’ll close this section by saying inflation and interest rate risks seem to be priced in. When you’ve had this kind of a correction and the broader market has joined in as well. We do believe that innovation is on sale and we do believe that it will be really important for investors to get to move toward the right side of change given the amount of disruption that we do expect.
That I hope our research today telegraphed to you. It’s also very important to keep that five-year investment time horizon the difference between linear growth and exponential growth. When you’re talking about a five-year period is enormous and because wright’s law gets us to I think to the right answer in terms of the exponential growth trajectories. The surprises are going to be enormous and most important we like to say as we’re focusing on the five years keep your eye on the prize. We realize it’s been a very difficult market. We also do believe and our conviction this past year actually has increased that these exponential growth trajectories have been accelerated by COVID and even more so now by the turmoil, we’re seeing in the labor markets logistics.
This article is a transcription of a video made by Jamie Tree
Original video: https://youtu.be/sYEVL1R87a4
