After twelve months favoring growth, Northlake’s Style model shifted to value for August. As a result, all client positions in the Russell 1000 Growth (IWF) have been sold and the proceeds reinvested in the Russell 1000 Value (IWD). The Market Cap model is still recommending Mid Cap, so all client positions in the S&P 400 Mid Cap (MDY) will be held for at least another month.
The shift toward value has been underway for several months as several of the Style model’s underlying indicators moved from a growth signal to a value signal. As is usually the case, the initial power of a new signal is not too strong. The models are designed to move gradually, capturing big trends, and avoiding a lot of back and forth. The key changes in the model that led to the new value are signal are (1) improved valuation for value stocks, and (2) better performance by value stocks.
The models often shift as the economic and stock market cycles change, In this case, I think it is more of a relative value call. Value has lagged growth as the economy has been stuck in slow growth mode. However, the economy is still growing despite awful headlines. Value stocks need a little help of the economy. Presently, a little help is all they are getting but with value stocks looking relatively cheaper that is enough to shift the signal.
The prior growth signal, in place beginning in August 2011, worked pretty well. Over the past year, IWF gained 5.16%, ahead of a 3.99% gain for IWD. A little over 1% might not seem like much but in a low return environment that is not bad.
There is nothing unusual in the reiterated mid cap signal. It is a little weaker and not far from changing to large cap. Large cap is usually favored when the economy slows as smaller companies need the tailwind of stronger economic growth. Investors appear to recognize this as over the past few months small caps have really struggled, including a decline of 1.5% last month when mid cap was unchanged and large caps were up over 1%.
Disclosure: IWD and MDY are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an Illinois-registered investment advisor. Regulatory filings can be found at www. sec.gov.