Over the past 12 months, the stock market has rallied by a significant amount. The main supporter behind this uptrend was the federal reserve, backed by jerome powell. The federal reserve has been printing a significant amount of money through policies such as low interest rates and quantitative easing, and while interest rates will continue being low in the near future, they are bound to increase eventually, once this happens, the stock market will likely crash as The primary driver for the bull market is no longer there. One investor kathy wood, the ceo and cio of arkhanvest has actually predicted the crash that i'm talking about knowing this here's a unique strategy to combat this possible stock market correction.

In this video i'm going to go over why kathy is predicting a valuation reset and what you should do to prepare. Welcome to castings academy, if you're new to the channel, please consider subscribing for more content like this and let's get right into it. As i mentioned earlier, the federal reserve cannot keep interest rates. Low forever and rates are bound to go up.

Eventually, the stock market is all about predictions for the future, so it's natural for the market to correct before rates actually go up kathy would predict that this correction will impact certain stocks more than others, and it just happens that our own etf is one of the Prime candidates, over the past few years, kathy's five ets have all gone up by a significant amount, with 2020 being her most impressive year, because of this kathy would actually said that her etfs are likely going to be heavily impacted by correction. Yet that doesn't mean you should sell all of your innovation related stocks. Kathy's strategy is what we'll go over soon. It seems undeniable to me, though, that you must be thinking about the impact of higher rates on the kinds of stocks that have been tried and true winners for you all throughout whether it's the signature fund, the fintech innovation fund and even other areas of the etfs.

That you have, are you worried that, as rates go up, those stocks could come down uh? Well, i i do believe. If rates were to take a sharp turn up, uh that we would uh, we would see a valuation reset and our portfolios would uh would be. Prime candidates, for that valuation, reset of course now one of the things that i found interesting over the last uh over the last really 20 years is that the the s p's p e ratio tends to peak out in the 20 to 25 times range of the Forward forward earnings, the stat that kathy would just mentioned was the s p 500 forward. P e ratio, which is the expected pde ratio for the s p 500.

In the next 12 months. As kathy mentioned, the s p 500 forward, pde ratio usually peaks out of 20 to 25.. The current estimate for the s p 500 forward pde ratio by the fourth quarter of 2021 is 25 because of that kathy wood is implying that a stock market correction is going to happen now that we know that you might be wondering. How can we use this knowledge to our benefit? I agree with you: scott.

There will be a valuation reset, there will be fear, i'm sure, and we will use it to our benefit, concentrating our portfolio to our highest conviction, names uh, but i think longer term, especially given the the powerful growth trajectories that the five innovation platforms around, which we Revolve all of our research uh that that those trajectories are so powerful, uh that these multiples, that they, these companies are going to grow into their multiples. A lot faster than most uh investors are now expecting, and so that's a source of confidence for us. What kathy? Just said is extremely important: why a way stock market crash is bound to happen. There's no need to be scared about it.

In fact, a stock market crash is a rare opportunity to go all in on your high conviction, stocks that means selling out of lower conviction. Stocks and buying into the stocks they have the most confidence in the other point that kathy makes here is key to understanding her long-term vision. Valuations are definitely high at the moment. After all, if you take a look at the price, the sales and pde ratios of stocks in today's market, you can clearly see that many are extended to very high points.

Nevertheless, if you think that a business is going to grow extremely fast in the next decade, then why would you bother selling that stock eventually, if that business continues growing at a fast rate, over multiple years, its price of sales ratio and pde ratio will come down To normal valuations, according to kathy wood, those are the types of companies that you should invest in companies that are going to grow by substantial amount. By that i am talking about companies that are going to grow so fast that their current multiples will come down significantly. In the future, some of you might be wondering whether you should sell some of your stocks right now. After all, if a correction is bound to happen, then why not sell now and buy later.

This is where cathy wood's unique strategy comes into play, so my question plays off with scott just asked: you do you take into account or do you have any type of forecast in terms of rates and adjust the portfolio to that forecast, or do you keep cash There and etfs are kind of interesting in terms of the level of cash you're allowed to keep or not keep um. So so how do you do it so rates right now, they're moving up. Do you say? Okay, we may be in a little trouble here with this valuation, reset they're going to jump up another whatever up to you know, maybe two percent: do you get in front of it or do you just take it as it comes? No, we we use it actually. Uh and so what we've been doing for the last six months, is expanding the number of names in our portfolio and we do that um as a bull market extends because in some ways it's a tax, efficient strategy.

What we will do during a correction, especially a severe correction, like the crisis presented, we will sell names in which which are creating losses now, because again, we've bought them. We've diversified and bought them more recently sell those names creating losses to buy our highest conviction names. Some of the names we've been moving into you'll notice. Uh are names like uh, some of the bigger biotech names, uh regeneron, novartis, uh, uh takeda, and what we will do during and we we think of them as cash-like, but there's also a reason, an investment reason.

We are moving into them uh, ironically, we think they're, deep value names, because these companies, the ones we are choosing, are uh. They are able to use the convergence of technologies that is taking place today in the genomic revolution, so dna sequencing, artificial intelligence once again and gene therapies, uh new technologies, new ways of doing things. The strategy that kathy wood is talking about is somewhat unconventional. Instead of selling stocks to horde cash right now, cathy wood is buying into what she calls cash-like stocks.

These are stocks that are currently undervalued and won't go much lower in a stock market correction. The strategy is to purchase these cash-like stocks right now and if a correction happens, then you would sell these cash-like stocks to purchase high-growth stocks kathy called these stocks deep value stocks and is for a reason. The three names she mentioned - regeneron, novartis and takeda - are all undervalued by their stock ratios. If we take a look at regeneron, it has a forward pde ratio of 10..

Additionally, novartis has a forward pd ratio of 14 and to kid it has a forward pde of just nine. These are very low valuations, especially in a bull market like today, yet they are at a discount for a reason. These stocks are in growth, stocks like tesla and amazon. At the same time, these companies aren't dying companies like nokia or blockbuster.

These stocks are ones that are expected to go at a relatively slow and stable rate. In fact, some are not growing at all. Takeda is expected to have its revenue declined by 1.2 in 2021 and 0.1 in 2022 because of these relatively stable rates of earnings and revenue, these companies serve as great cash substitutes. The reason why you should invest in these instead of holding cash is because of the win-win situation they provide.

The two situations are that the market continues going up and that the market crashes. The first situation, is that the bull market continues. While we can almost be sure that a stock market correction is coming, we don't know when it will happen. If the bull market continues, these stocks won't fall.

Much in fact they might not even fall at all. Kathy actually has a strong case for why these stocks will increase in value over the next few years and will soon go over that in the first situation. The bull market will only continue if the federal reserve continues printing money. In that case, inflation is bound to happen, and these companies are a great hedge against inflation.

If you hold cash, the federal reserve will just continue printing money and the dollar will lose value. If you hold these deep value stocks, then you will be protected against inflation, because these companies are selling products that are immune to inflation. The second situation is that the stock market crashes - in this case these deep valley stocks, won't be hurt as much the stocks that will be hurt. The most are those that have already gone up significantly in value stocks like tesla square and roku will likely go down.

The most in a stock market crash as they are more volatile in the bearish scenario. After the market crashes, you can sell these deep value stocks and purchase stocks like tesla square and roku at a discount. That way, you won't lose much money on the deep value stocks and you will be able to purchase your high conviction stocks at a discount, as we can see in both scenarios, the deep value stocks serve a fantastic purpose. Now, let's get into why kathy cc's deep value stocks increasing in value over the next few years, they are investing aggressively.

Now they have to because they've lost a lot of their pipelines or will soon do so uh and we think the returns on investment in the biotech space and i'm talking big biotechs. If they're doing this correctly could move from the high single digits today back into the golden age of health care, so in the 80s we saw 20 to 30 percent, so we're using them as cash like instruments in in some some way, because we will move back Into our pure play names, if we get into a severe correction, but we also see the investment merit in these names. They're, just not pure play names, so we we use, corrections, toggling back and forth, and so right now our flagship uh. Our flagship portfolio has roughly 52 names in it at the low point in the coronavirus last year.

It was as low as 33. I believe. As kathy mentioned, the deep value stocks aren't just slow growing stocks. Large biotech names like regeneron and takeda are looking to innovate.

In the way they serve their patients. If these innovations are successful, then their market share could increase by three or four times. If their innovations fail in the stock market crashes, then kathy will just sell all of these big name biotech stocks and purchase their high conviction. Stocks, in my opinion, this is a pretty clever strategy.

It gives you the opportunity to make high returns if these biotech firms can innovate with new products and services, but it also provides downside protection in case the overall stock market falls. However, i don't believe in selling the majority of your high conviction stocks even at these valuations. By the way my patreon is now open with limited slots. By joining, you will obtain access to my full stock portfolio, exclusive, buy and sell alerts, valuation spreadsheets and more.

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