We begin 2022 sticking with our preference for small and mid caps, while remaining neutral on growth vs. value.  Our Market Cap and Style models favor the S&P 400 Mid Cap (MDY) and are neutral on the Russell 1000 Growth (IWF) and Russell 1000 Value (IWD).  These positions will be maintained.  On our thematic strategies, we also continue to favor small cap value and find exposure to international developed markets and emerging markets attractive.

Northlake has maintained a preference for small and mid cap and value for some time.  The set up for these areas to produce sustained outperformance has existed for some time.  However, despite some very strong stretches (late 2020, early 2021, November 2021), large cap growth has held onto leadership.  We will have more detail in our 2022 Market Outlook but we see the combination of tighter monetary policy, above average economic growth, higher inflation, and a massive valuation discrepancy creating a favorable backdrop for small cap, mid cap, and value. We also see COVID losers that have significant overlap with small and mid cap and value outperforming in 2022 as each successive wave of the pandemic has less economic impact due to vaccinations and a reluctance to impose strict new mobility restrictions.

We still expect rotation among these big picture themes on a short-term basis driven by investor sentiment toward the path of real and nominal interest rates, COVID developments, the economic environment, and corporate earnings expectations and reports. 

To clarify one potentially confusing issue, we see the issues in growth stocks more heavily concentrated in speculative stocks that are unprofitable and trade at a multiple of revenue.  Rotation toward small and mid cap and value could hurt the relative performance of large cap growth stocks like Apple, Alphabet, and the other FAANGs.  However, these companies produce strong earnings and cash flow that are used to support shareholder value.  These stocks also have reasonable valuation metrics despite strong performance again in 2021.

MDY, IWF, and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. SPY is held in 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.