Northlake’s Market Cap model shifted from large cap to a weak mid cap signal for May.  We are using discretion and waiting to make the change in client portfolios given the ongoing market volatility and uncertainty about progress of reopening the economy while containing the pandemic.  Moving to mid cap adds a higher risk, higher reward investment.  While we have shared with clients that we see the market outlook as more balanced, we still think it is best to play it safe overall and manage client accounts with extra caution.  We expect to complete the swap from large cap to mid cap (S&P 500/SPY to S&P 400/MDY) but prefer to use our discretion on timing.

The Style model continues to recommend growth.  We are comfortable with that recommendation given growth companies are better positioned when the economy is under such unusual stresses.  As a result, client positions currently invested in the Russell 1000 Growth (IWF) and S&P 500 Growth (SPYG) will be held another month.

Looking at the detail on the shift to mid cap in the Market Cap model, we see a split between internal technical/trend indicators and external economic indicators.  Historically, the best time to buy small and mid cap stocks is in the depth of a recession.  These stocks typically have suffered the most by that point and then lead the way higher as the market looks toward economic recovery.  The model’s external indicators are at this point.  The internal indicators are not confirming the signal as investors continue a multiyear theme of favoring large companies.  With the growing dominance of giant technology companies like Apple, Amazon, Microsoft, Google, and Facebook, the focus on large cap makes sense.  Keep in mind these stocks represent about 20% of the S&P 500 presently.  Complicating the current signaling of the models is that these same large companies plus others like Walmart or Home Depot stand to emerge from the economic shutdown and pandemic in even a stronger competitive position.

In the end, we are applying to Northlake the same advice that we have shared with our clients: the pandemic and economic shutdown impacts each of us individually, so showing flexibility in investment decision-making independent of rigid approaches is acceptable.

IWF, SPYG, and SPY 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