Q1 2021 Stock Market Commentary

The market continued to surge higher as we said goodbye to 2020 and hello to 2021. Additional stimulus, mass vaccinations, and hopes for a return to a fully opened economy provided a nice backdrop for the market to further its gains. As rosy as that all sounds, we did run into some volatility late in the quarter as we saw interest rates on treasury bonds spike higher.

Stimulus Economic Impact

Many believe all of this stimulus from the government over the last 11 months could lead to an uptick in inflation. Despite the volatility, we did manage to close within a hair of an all-time high on the S&P 500 as it was able to add a 5.8% gain for the quarter. The Dow was even stronger as it posted a gain of 7.8%, while the NASDAQ was stronger by just 2.8%.

Growth to Value

There is something glaring about those returns in the above paragraph. Looking back on 2020, it was the NASDAQ that led the way with a 43.6% return while the Dow was up just 7.2% last year. Now we seem to have new leadership. There seems to be a major rotation from the high-flying tech stock that make up the NASDAQ and into the boring Industrials that make up the Dow Jones Industrial Average. You can actually see the divergence from growth into value beginning in August of 2020. It was initially subtle, but the rotation has picked up some steam over the past several weeks. We have seen these fits and starts before, only to fizzle out and see the growth trade continue. We may see a repeat of that if interest rates settle in here, or this may end up being a longer-term move.

Rotation Continues

It will be interesting to see how this plays out in the coming weeks and months. There are many factors that can impact this rotation trade that is happening and if it continues, it could last for a long time. With that said, it could just as easy flip the other way providing the growth stocks with a much-needed correction, which could provide a foundation for the next leg higher. Either way, it is not necessarily a bad thing to see the recent volatility, as it does tend to create some buying opportunities.

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Chesapeake Financial Advisors is a fee-only financial planning, investment advisory and tax planning firm with offices in Towson, Columbia, and Frederick, Maryland.

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