As we anticipated in last month’s analysis, Northlake’s Market Cap model shifted from large cap to mid cap with the latest update.  The models use two-month averages to reduce signal volatility, so dropping November’s strong large cap reading in favor of January’s new small cap reading flipped the signal.  Most of the shift over the last two months is related to technical and trend factors as large cap stocks underperformed, dragged down by weak performance from the mega cap tech stocks.  There was a shift toward mid cap in the auto sales indicator, reflecting a bottoming as new car supplies improve.  Mid cap stocks are more sensitive to the economy than large cap, partially because the large cap index weighting is dominated by growth stocks.  Overall, the shift to mid cap is consistent with Northlake’s thesis that the economy will continue to show resilience even as growth slows.  A recession may develop in line with the consensus view but we think it will be mild to moderate if it happens. With the new mid cap signal in place, we have moved client assets using the model from the S&P 500 (SPY) to the S&P 400 Mid Cap (MDY).

There was no change to the Style model, which continues neutral on growth vs. value.  There was a slight shift in favor of growth in this month’s underlying indicators related to the economy.  However, this was offset by the continuing reset of mega cap tech valuations, leaving the model at neutral.  Like for Market Cap, Neutral is consistent with Northlake’s views on the economy and markets.

MDY, 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.