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Q1 Recap and "Where Do We Go From Here?"

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April 12, 2021

Q1 2021 showed us that the market is very efficient at discounting all known information that’s out there. The market was early, and right, in pricing in the exact scenario that has been unfolding. It started last fall with the rotation to value and small-caps, with bond yields starting to rise, and it continued throughout the first quarter of this year. What are we seeing? We’re seeing a very strong, broad-based rally. The S&P is up above 4,000 for the first time ever and roughly 90% of stocks are trading above their 50-day moving average. It has been encouraging to see that the rotation out of large-cap growth did not take the market down with it. The FAANGs have occupied as much as 25% of the market (now closer to 20%) and a lot of investors thought that if market leadership rotated towards value and small-caps that the whole market would take a hit, and that didn’t happen. This is a trademark sign of a bull market.

The expectation was that 2021 would be a year where most of the action would take place beneath the surface, as opposed to at the surface. So far, this has generally been the case. FAANG stocks falling out of favor and the market rotating into a much smaller segment (small-caps by definition are smaller) had a lot of people thinking that such a rotation could derail the market. The dot-com bubble in 2000 was essentially that. The mega-cap growers at that time fell from grace and took the rest of the market with them all the way down 53%. This is not happening today. Volatility is here, which we saw with the Archegos hedge fund that blew up last week and the GameStop ($GME) short squeeze a few months ago. These were big tremors in the market that caused volatility but so far have been isolated incidents. The rotation taking place can be volatile at times, but then it passes and the market goes back to doing what it has been doing for months, which is pricing in a booming economy.

So the question is “Where Do We Go From Here?”… Attached are my comments on Q1 and some viewpoints that answer that exact question. I address three themes that I believe will define the economic and market environment through the remainder of 2021. I hope you enjoy the insight.

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