Northlake’s Market Cap model flipped from mid cap to large cap for June. As a result, client positions following the model previously invested in the S&P 400 Mid Cap have been sold and proceeds reinvested in the S&P 500 (SPY). There is no change to the Style model, so current client positions in the Russell 1000 Growth will be held at least another month.
The shift to large cap occurred as one factor in each of the internal and external indicators moved from small cap to large cap. This leaves six of the eight internal indicators and seven of the eight external indicators flashing large cap. Since the start of the year when small cap was favored by the Market Cap model, there has been a steady move in favor of large cap. The indicators are picking up on two related issues. First, economic data while remaining positive has not accelerated as expected after the election. Second, as the Trump agenda has stalled, the initial large gain in relative performance favoring small caps after the election has mostly reversed. This has moved the internal technical indicators measuring trend and momentum from small cap to large cap. In simpler terms, small caps perform best if economic growth is expected to or beginning to accelerate. So far, despite some deregulation that should help small caps earnings growth, this has not been the case.
The Style model is pretty firmly in growth mode for the second consecutive month after a several month run at neutral. The Style model is picking up the same issues as the Market Cap model – moderate GDP growth but without acceleration. Seven of the eight internal indicators in the Style model are on growth, the same as last month. The external Style indicators remain split with three favoring each of growth and value. Growth stocks perform best relative to value stocks during periods of slower economic growth as growth companies need much less tailwind from the economy to drive earnings growth. This has been quite evident in recent months as evidenced by the huge gains for leading growth stocks like Google, Amazon, and Facebook.
During May the models did a pretty good job. The Style model shift from neutral to growth that began in May proved timely. Growth easily outperformed value with the Russell 1000 Growth (IWF), Northlake’s current holding, gaining over 3% against a small decline for the Russell 1000 Value (IWD). The Market Cap model was on mid cap for May after several months recommending small cap. The change to mid cap was timely as small caps fell almost -2% in May against a just a small loss for mid cap. However, large cap would have been the ideal holding for May as the S&P 500 gained over 1%.
SPY 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, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.