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Will we look back at March of 2021 as an inflection point in the markets?  We saw a big rotation away from some of the asset classes and stocks that have been working into areas that haven’t for some time.

First off, the 10-year Treasury bond yield has continued its move upward.  We’re at just under 1.70% as of this writing.  Still low in the grand scheme of things but a big move considering we started the year at just over 0.90%.

Why is this important?  First, the market is starting to take inflation very seriously.  5-year inflation expectations are now the highest they’ve been since 2008.

Source: Bloomberg

This is causing everyone to rethink how they are positioned in their stock portfolio if interest rates continue to rise and inflation does materialize.  Case in point, take a look at the performance of Tesla vs. Ford since the start of the year:

No one will argue that Ford is a more exciting or innovative a company as Tesla.  But big institutions value stocks based on their profits years into the future.  Rising interest rates cause the present value of the future cash flows of these high-growth companies to be worth less.

This is called discount cash flow analysis, and you can see the math on a theoretical example here.

Just look at the sell off in the high-flying stocks popular with the Robinhood crowd:

Source: Michael Batnick

The bigger tech companies that dominate the S&P 500 like Amazon, Apple, and PayPal have sold off as well.


Where is some of this money going?  Some of it is going into beaten down value stocks.  Look at how some of the big American blue chips like Exxon, Bank of America, and Caterpillar have been doing this year.

Selling a stock like Apple to buy Bank of America might not make so much sense now, but if the market is right about inflation we may see a much different investing environment in the coming years.

The good news for those of you that use index funds and don’t pick stocks?  You probably haven’t noticed all that much.  The S&P 500 is still up over 5% year to date.

Is this the end of the tech stock rally as we know it? It sure seems like we are witnessing a regime change in the markets for the first time in over a decade.  Only time will tell if this is a true rotation from high-flying growth stocks to good old-fashioned blue chips.  Now is as good a time as any to take a look at what you own and determine if it will still be the appropriate mix if we do see this trend continue.