For the fifth consecutive month, there is no change to the recommendations from Northlake’s Market Cap and Style models for July.  This is toward the top end of the range for recommendation stability across both models.  The Market Cap model continues to recommend Mid Cap and the Style model still favors Growth.  With no changes for July, client positions following the models will continue to be invested for at least one more month in the S&P 400 Mid Cap (MDY) and either the Russell 1000 Growth (IWSF) or S&P 500 Growth (SPYG).

There was some interesting movement in the indicators that drive the Market Cap model.  Overall, the model continues to be a weak mid cap signal that is much more likely to shift to large cap than small cap on its next move.  What is interesting is that there is a split developing between the models internal and external indicators.  The internal indicators, which measures stock market trends and technicals, remain solidly in favor of large caps.   This makes sense given large caps easily outperforming small caps over the past twelve months and so far in 2019.  The external indicators that cover economic fundamentals took a big step toward small cap, moving from almost unanimous support for large caps to a 50/50 split between large cap and small cap.  The shift is a direct reflection of current macroeconomic trends — weakening economic data and a dovish Federal Reserve.  Small caps tend to outperform when economic data is weak as investors look ahead to the next move that is most likely to be improvement in the economic data.  Thus, an indicator that measures the ratio of coincident to lagging economic data has moved to a mode that favors small caps.  Another indicator that measures the shape of the yield curve has shifted toward small caps as the yield curve has begun to steepen slightly reflecting the likelihood that the Federal Reserve cuts the Federal funds rate over the next several months.  The movement in these two indicators makes sense.  The Fed is doing everything it can to accelerate economic growth after a steady deterioration in the data.  This is a good setup for small caps to outperform large caps.  The Mid Cap signal reflects the mixed data in the model but would work well should small caps regain the upper hand.

The Style model remains on a strong growth signal with little change since last month.  Both the internal and external indicators strongly favor growth, a reflection of weakening economic data and continued market leadership for large cap growth stocks.  Growth companies need less help from the economy to hit their earnings growth targets and expectations, so investors continue to favor investing in growth sectors supporting the trend and technical evidence that favors growth.

MDY, 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