There were no changes to Northlake’s Market Cap and Style model signals for February. The Market Cap model continues to favor mid cap, while the Style model still recommends value. As a result of the latest signals, Northlake clients will maintain positions in the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD).
Underlying movement in both models was minimal. The mid cap signal did weaken slightly and is not far off a switch to large cap. Recent weakening in the dollar as the European crisis eased moved the U.S. Dollar indicator in favor of large caps. The rest of the Market Cap model indicators remained unchanged for February.
Since a strong small cap signal in November, the Market Cap model has shifted steadily toward large cap. The message is that the economic recovery is moving into a more normal phase of sustained growth. As a result, it no longer pays to own the riskiest of the three asset classes (small, mid, and large cap equities). It is counterintuitive but it is usually best to own the risky asset at extremes. As the extreme, reversion to the mean, or the risk trade, pays off. Now that economic risk has receded, as recent data shows steady strengthening, the model is moving to safer investments since the incremental upside in risky investments is less.
The Style model shifted to growth for one month back in November but is now firmly in value territory again. That makes nineteen of the last twenty months where value was favored. Value is favored when the economy is recovering or at the depths of recessions. Value stocks tend to be cyclical and get a boost when the economy is bottoming or improving. Growth works best when an economy is in late stages of expansion as the unit growth characteristics of growth companies become more highly valued as the economic tailwind slackens.
Neither model added or subtracted much from portfolio performance last month. Both models gained slightly over 2%, bracketing the 2.3% return for the S&P 500.
Disclosure: MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve Birenberg is sole proprietor of Northlake, an SEC registered investment advisor.