Northlake’s Style model shifted to a full growth recommendation after spending two months neutral on the growth vs. value themes.  The Market Cap model continues to recommend mid cap for the third consecutive month.  Client positions in the Russell 1000 Value (IWD) have been sold and the proceeds reinvested in the Russell 1000 Growth (IWF).  Current positions in the S&P 400 Mid Cap (MDY) will be maintained.  Clients with taxable accounts may continue to own a position in the S&P 500 Growth (SPYG) due to prior tax-related trades.

The shift to growth was driven primarily by recent stock market action where growth stocks outperformed value stocks by a considerable margin.  In January alone, certain growth indices produced returns more than 4% in excess of value indices.  This is an unusual occurrence even during the current multiyear stretch where growth has consistently been the best performing theme.  It may seem counter intuitive but momentum is usually a good near-term indicator in the stock market, so the big relative gains for growth recently are likely to be sustained.  Northlake’s models are designed to consider this momentum influence through the internal indicator factors that measure stock market trends and technical analysis.  The latest Style model reading shows a unanimous growth reading among the eight internal indicators.  There were also two external indicators that shifted from value to growth.  External indicators look at factors in the economy and interest rates.  Four of six indicators currently favor growth reflecting continued slow but steady economic growth.  Growth stocks outperform when the economy is not strong enough to boost the more cyclical industries that are considered value investments.

The Market Cap model saw several indicators shift in favor of small caps.  The single month reading actually has moved into small cap territory but the model uses a two month moving average in order to dampen volatility and improve the odds that recommendations prove to be at important turning points.  Small cap stocks have had a historically long stretch of lagging large cap stocks.  This is partially due to the dominance of technology and internet companies in the economy.  It is also linked to the slow growth in the U.S. and global economies.  Small caps are best either when economic growth is at least average or when growth has been very slow.  This is because smaller companies need a little economic boost or get too depressed when growth is very slow or negative.

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