Despite a tough June and second quarter for our Mid Cap and Value recommendations, we are sticking with these themes.  Client positions in the S&P Mid Cap 400 (MDY) and Russell 1000 Value (IWD) that are linked to our Market Cap and Style models will be maintained.  For clients not invested in our models but using our favored themes, we plan to stick with investments in value sectors like Financials (XLF) and Industrials (XLI).  We also continue to favor investments in non-U.S. stocks in both developed (EFA/VEA) and emerging markets (EEM/VWO, XSOE).

Two factors have driven the latest rotation among market cap and style themes.  First, the prospect that the Federal Reserve has moved a step closer to beginning to remove monetary accommodation and raising interest rates has led to a rotation in favor of large cap growth stocks.  Second, investors are focused on inflation, and have recently accepted the Fed’s view that current trends are transitory.  This has led to a decline in market-based interest rates which is a powerful tailwind for large cap growth stocks. 

We see the latest rotation as temporary given continued strength in the economic recovery as COVID fears and restrictions recede.  Tighter monetary policy is a headwind for small cap, mid cap, and value stocks.  However, we still see monetary policy remaining highly accommodative well into 2022 and believe that there is another move higher in our favored themes which remain inexpensive against still rising earnings expectations.

Our Market Cap and Style models also support our recommendations.  In Style, the latest readings reveal movement toward growth, but the model reading remains firmly in value territory.  The movement reflects a shift in technical and trend factors given the recent good performance for growth stocks.  External factors continue to strongly favor value.  There were no changes to any factors in the Market Cap model.  The model remains solidly in mid cap.

While the second quarter performance of our models and themes lagged the market, on a year-to-date basis performance remains positive on an absolute and relative basis.

MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  XLF, XLI, EEM, VWO, EFA, VEA, and XSOE are held by clients of Northlake Capital Management, LLC.  Steve is sole proprietor of Northlake, a registered investment advisor.  Northlake’s regulatory filings can be found at www.sec.gov.