Northlake’s thematic model recommendations are unchanged for December. The Market Cap model again favors large cap after last month’s change from mid cap. The Style model begins a fifth consecutive month at neutral between growth and value. Client portfolios that use Northlake’s models will continue to own the S&P 500 (SPY) for market cap exposure, while style exposure will remain split between the Russell 1000 Growth (IWF) and the Russell 1000 Value (IWD).

The Market Cap model had underlying movement back toward mid cap despite the large cap signal this month. The internal factors have been progressively moving toward favoring small cap for the last two months. However, the external factors have mostly remained steady in suggesting large cap. Relative performance of small cap has been improving, and better market breadth also favors a move back toward small cap. But measures of short-term market sentiment have become more optimistic, which could favor defensive large cap companies if investors begin to reverse their views. Recently, lower interest rate expectations have become a support for smaller companies which tend to be more sensitive to changes in borrowing costs. We expect the combined model could shift back to mid cap as soon as next month.

The fifth neutral reading in a row for the Style model belies choppy changes among the individual factors. Several internal factors moved toward favoring value from the November reading, showing that value has recently been outperforming growth. One external factor related to the weakening US dollar shifted to favor growth, with the falling dollar suggesting a slowing economy that would benefit growth companies that don’t rely on economic growth for increasing profits. Overall, the model shifted toward value, but we expect the model to remain neutral until the fundamental and technical aspects come into balance.

SPY, IWF, and IWD 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.