Despite weak and volatile markets in September, we are sticking with our preferences for mid cap and neutrality on growth vs. value.  The September decline in stock and bond markets was broad-based with little variation in performance across market cap, style, sectors, and industries.  Northlake believes the market ended September oversold vs. our expectation for no worse than a normal contraction in economic activity and earnings in the next three to six months.

Northlake was quiet in equity trading during September, while we were active in fixed income.  After hawkish back-to-back Federal Reserve events (Powell’s Jackson Hole speech and the September meeting), interest rates across the yield curve moved up to levels last seen more than a decade ago.  Significantly, the U.S. Treasury yield curve once again offered good buy and hold returns of plus or minus 4%.  For the investment objectives and risk tolerance of most Northlake clients, the ability to lock in 4% returns on a portion of their assets makes a lot of sense.

Our initial approach was to invest excess cash reserves in 3-, 6-, and 12-month Treasury bills.  In isolated cases, we purchased 2-to-5-year Treasury bonds. These investments earn a good return against a volatile and uncertain economic and geopolitical outlook and produce a yield well above current money market rates.  The Treasury bills are also extremely liquid should an alternative use of cash reserves become necessary.

In the last few days of September, U.S. Treasury rates fell after the Bank of England made a policy change that relieved stress on global yields.  With the Federal Reserve likely to push the Federal Funds rate to around 4.5% over the next six months, Northlake will evaluate reinvestment opportunities as the Treasury bills mature with an eye toward locking in yields in the 2-to-10-year range.  We also have the option of investing cash in individual stocks or index funds if the stock market environment stabilizes.   We are seeing a lot more opportunity in quality stocks after the 25-35% declines in the major averages so far this year.