There are no changes to the signals from Northlake’s Market Cap and Style models for September. The Market Cap model is recommending large cap for the fourth straight month, while the new neutral signal generated last month by the Style model stays in place. As a result of the latest model update, clients will continue to own the S&P 500 (SPY), the Russell 1000 Growth (IWF), and the Russell 1000 Value (IWD).
The Market Cap model shifted slightly more in favor of large caps for September, primarily reflecting the strong relative performance of large caps during August. Despite heightened volatility, the S&P 500 squeezed out a tiny gain in August but gains were narrowly distributed as evidenced by small and mid cap indices showing meaningful declines of -1% to -2%. Trend and technical indicators are an important part of Northlake’s models, so significant divergence in performance among large, mid, and small caps will impact the model readings. This aspect of the model is designed to introduce timeliness into the signals. One factor did move in favor of small caps. A change in investor expectations toward interest rates, now anticipating lower rates, is positive for small caps. Smaller companies have less access to debt financing, so lower interest rates historically have been a positive for their relative performance. Continued mixed economic data and lack of inflation have altered investor views of the timing of further tightening of monetary policy by the Federal Reserve.
The Style model saw some underlying indicator movement that left it sending a stronger neutral signal. A “stronger neutral signal” sounds strange but the model scores each indicator and sets a 0-100 range for its final score with neutral readings at plus or minus 50. So what we are really saying is that the Style model moved toward the middle of its neutral scoring band. The Style model remains spilt with internal indicators favoring growth, while external indicators prefer value.
August model signals were helpful to portfolio performance. The large cap signal worked very well given the disparity in performance between the S&P 500 and the Russell 2000 and S&P 400 Mid Cap outlined above. Growth had a very strong month relative to value, so the shift to neutral from growth at the start of August was untimely. Nonetheless, exposure to growth through the neutral signal was helpful.
SPY, IWF, and IWD 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.