There are no changes to the recommendations from Northlake’s Market Cap and Style models for December.  The Market Cap model remains on a small cap signal for the second consecutive month and the Style model favors growth for the third consecutive month.  The signals from both models strengthened slightly for December.  Client positions following the models will remain invested in the Russell 2000 Small Cap (IWM) and the Russell 2000 Growth (IWO) for a least another month.

November was a good month for the stock market that on the surface featured the continued trend of low volatility.  However, the relative performance of small vs. large cap and growth vs. value was volatile within the month with a return to rapid rotation.  For example, small caps lagged to start the month, while growth took a big hit at the end of November.  Northlake’s models are composed mostly of longer term indicators but do include trend and technical factors that are designed to pick up short-term stock market gyrations.  Overall, the models are telling us that the economy and interest rates remain favorable for stocks, arguing for an aggressive posture that favors more volatile, higher beta assets like small cap and growth stocks.

A couple of things we are watching as we head toward yearend and into 2018 are Federal Reserve policy and earnings growth.  Led by the investor interpretation of future Fed actions, interest rates have risen modestly in the past month in anticipation of continuing increases in the Fed Funds rate through 2018.  Third quarter earnings showed nice growth and investors liked what was reported but the rate of earnings growth decelerated, albeit from elevated levels, and is projected to decelerate in the future (independent of corporate tax cuts).  Market history suggests that tighter monetary policy and peaking earnings growth are headwinds for stock prices.  Northlake does not see either of these issues as a big problem looking out the next six months but we are monitoring each closely.

Last month’s fresh signals in small cap and small cap growth performed in line with the benchmark S&P 500.

IWM and IWO 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.  IWM is used as a hedging vehicle in the Entermedia Fund.  Entermedia is along/short equity hedge fund managed and controlled by Steve Birenberg.