We are sticking with our current positioning for at least another month after reviewing the latest updates from our Market Cap and Style models. We will continue to hold current positions following the models including the S&P 500 (SPY), Russell 1000 Growth (IWF) and Russell 1000 Value (IWD).  We will also stick with our preferences for clients investing in thematic ETFs.  This includes holdings in the sector funds for financial (XLF) and industrial (XLI), small cap value (IWN), and exposure to developed economy international (EFA/VEA) and emerging markets (EEM/VWO).

The message from our models and our review of recent economic data and stock and bond market trading trends is that the rally has the potential to continue and to broaden.  We see concerns about the slowing economy, higher inflation, and monetary policy as misplaced.  The economy is slowing but the outlook for the next year at least remains for GDP growth well above pre-pandemic levels.  Supply chain issues are a headwind, but we see them eventually being resolved with deferral rather than destruction in demand except for pure holiday-related spending. Inflation has also moved higher, but we accept the transitory argument put forth by the Fed due to secular factors like demographics and technology leading to maturation of the major Western economies (and maybe even China).  The Fed is tapering and may begin raising the Federal Funds rate in 2022.  Tapering is surely less accommodative, but we do not see it as having the same impact as tightening policy.  In fact, for most of the next six to nine months, the Fed will still be a new buyer of bonds and beyond this frame will just step away from the market rather than selling its large portfolio of bonds.  Higher rates present a challenge whether market-driven or triggered by the Fed.  Rates are likely to remain quite low by historical standards, returning policy to a normal economic environment.  Investors may like normal after a decade plus of unusual investing environments.

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