There are no changes to the signals from Northlake’s Market Cap and Style models.  We are sticking with our current recommendation of Mid Cap and remaining neutral on growth vs. value.  Client positions using the models in the S&P 400 Mid Cap (MDY), the Russell 1110 Growth (IWF), and the Russell 1000 Value (IWD) will be maintained for at least another month.  We are also making no changes to our other thematic investments that favor international developed and market equities and U.S. equity sector bets on financial, health care, and industrial stocks.  ETF-focused portfolios also continue to have a small tilt toward small cap and value.  Finally, one investment theme we continue to add investments in is higher interest rates across the yield curve.

We continue to manage cash aggressively using Treasury bills and have begun to increase allocations to intermediate term bonds maturing in two to seven years.  The ability to lock in 4.5% to 5% buy and hold returns without credit risk is very attractive against an uncertain near-term and long-term outlook for equities.  Stocks historically have returned 8-10% per year with high volatility.  We believe the next five years could produce positive but below average returns as the era of ultra-low interest rates and inflation may be over and maturity of the world’s largest economies reduces potential earnings growth.  The peak of globalization is a primary consideration driving our views.

Near-term the market is grappling with higher interest rates as inflation is moderating a slower than expected pace.  In turn, higher rates increase the risk of a hard landing for the economy.  Northlake still believes a soft landing is likely thanks to strong employment data outside of technology companies and steady consumer spending patterns.  Nonetheless, the odds of a soft landing have declined due to the latest inflation data and the likelihood tight monetary policy remains in place well into 2024.  We believe the stock and bond markets reflect the uncertainty about the path of economic growth following February’s pullback in equities and move higher in interest rates.  We expect a trading range for stocks and bonds over the next few months with downside and upside roughly equal.  Ultimately, we expect the Fed to indicate it has completed its tightening and the economy to have held up pretty well.  This should set up better returns for equities later in 2023 and into 2024.  We also believe interest rates are near their peak which supports beginning to add two-to-seven-year maturities in client portfolios.

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.