Effective 1/1/19, Northlake’s Style model moved back to Growth after four months at neutral.  The Market Cap model remains on a large cap signal for the fifth consecutive month.  Client positions in the Russell 1000 Value (IWD) or S&P 500 500 Value (SPYV) have been sold with proceeds reinvested into the Russell 1000 Growth (IWF) or S&P 500 Growth (SPYG), respectively.  Current client holdings in the S&P 500 (SPY) or Russell 1000 (IWB) providing exposure to the Market Cap model will be maintained for at least one more month.

The shift from neutral to growth occurred after three indicators previously favoring value flipped to growth.  Taken as a group, the three indicators show that growth stocks are gaining relative strength compared to value stocks at the same time that growth stocks momentum has turned up following several months of very weak price performance.  Given the recent high profile declines in Facebook, Apple, and other high profile large cap growth stocks, it is important to remember that these indicators look at the Russell 3000 Index, essentially the 3000 largest cap stocks trading in the United States.  Furthermore, while the decline in growth stocks has received a lot of attention, the latest stock market declines are centered on fears of a U.S. recession beginning in 2019.  This has led to even sharper declines among cyclical value stocks in industries such as banking and energy.  The models are designed for relative performance.  In this case, we want to be in the best performing group of stocks, either growth or value.

Briefly looking back at 2018, the models performed pretty well.  The Market Cap model closely tracked the S&P 500, which would be expected given the model recommended large cap for eight of the last nine months of the year.  While the S&P 500 was down in 2018, on a relative basis it outperformed small and mid cap, so the Market Cap model did its job.

Results were even better in the Style model, where an emphasis on growth through August allowed the model to capture the upside in growth relative to value before the trend reversed in the final months of the year.  The Style model spent the last four months of 2018 in neutral mode.

More analysis of the model’s 2018 performance can be found in yearend client letters that will go out next week.

SPY, IWF, and SPYG 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