There are no changes to Northlake's Market Cap and Style models for November. Mid Cap and Growth remain the favored themes. As a result, client positions dedicated to these models and currently invested in the S&P 400 Mid Cap (MDY) and the Russell 1000 Growth (IWF) will be maintained for at least another month.
For the last few months I have been expecting the Market Cap model to shift to large cap, reflecting the weak economic outlook. Most of the model's economic indicators already favor large caps. However, the models also contain interest rate and stock market technical components. These indicators continue to favor riskier small caps leading to an overall balanced model reading that settles on Mid Caps.
Interest rates remain unusually low, driven by Federal Reserve policies to support and improve the domestic economy. Low interest rates favor risk-taking and smaller companies with less access to capital. The technical indicators are specifically included to help the timeliness of the models. The huge market rally in October kept these momentum based indicators in the small cap camp. With recent U.S. economic data looking better, I feel OK about sticking with higher risk Mid Cap for another month.
The Style model still favors growth as underlying indicator movement was modest. Strong performance from value stocks (led by financials and commodities) in October's rally moved the technical indicators from growth to value but this was offset by economic indicators moving in favor of growth. Growth is more valuable in a slowing economy as growth companies have their own earnings drivers and are less dependent on an economic tailwind. I am comfortable with growth as technology is most likely to lead the U.S. out of its economic troubles.
The models put in a solid performance last month, reversing some recent inaccurate signals. Mid Cap rose over 13% in October, ahead of the 10% gain for large cap, as measured by the benchmark S&P 500. Value slightly beat growth, up 11.5% vs. 10.8% but both indices beat the S&P 500. The current Mid Cap signal has been in place since December during which it has lagged the S&P 500 by about 1%. The Growth signal is beginning its fourth month. Thus far, it has done well, producing a return about 1% ahead of value.
Disclosure: MDY and IWF are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.