Volatility in the financial markets and economy during March triggered a shift in the recommendations from Northlake’s thematic models.  For the first time since September 2020, the Style model is recommending growth.  The model signal had been value or neutral for two and a half years.  The Market Cap model shifts back to large cap after three months at mid cap.  In both models, there are technical/trend and fundamental factors driving the changes.  As a result of the new signals, we are selling the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) and reinvesting the proceeds into the S&P 500 (SPY) and Russell 1000 Growth (IWF) for client accounts using the models.  For client accounts using thematic strategies executed with ETFs, changes are under review.

Outperformance by large caps and growth was already underway prior to the banking crisis triggered by Silicon Valley Bank.  The Fed response and investor views that the crisis increased the chances of a recession led to a sharp shift downward in interest rates across the yield curve.  The Fed pushed back on investor sentiment by raising the Federal Funds rate in March and indicating that rate cuts are unlikely before next year.  Nonetheless, the bond market rally leading to lower interest rates has mostly held.  With financial markets now anticipating lower interest rates and a more likely recession, history suggests that large cap and growth should outperform in the months ahead.  Large cap benefits in weaker economic environments due to a lower weighting in cyclical stocks and having stronger balance sheets across economic sectors.  Growth stocks benefits due to the ability to produce earnings growth without an economic tailwind.

SPY and IWF 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.