There are no changes to the signals from Northlake’s Market Cap and Style models after the latest update.  Last month the models switched to Large Cap and Growth and fresh data shows those signals are even stronger.  The technical and trend indicators are leading the way which is not a surprise given the widely discussed leadership for mega cap tech stocks in the current stock market rally.   Also supporting the growth signal is slowing economic growth and fear a recession will begin in the months ahead.  The updated signals are near peak readings for Large Cap and Growth.  Client positions following the models will stick with the S&P 500 (SPY) and the Russell 1000 Growth (IWD) for at least one more month.

While mega cap tech has led the way, our favored domestic theme in financials and industrials have lagged.  This is mainly due to recession worries that were exacerbated by the Silicon Valley Bank crisis and subsequent failures of a few other large regional banks.  Regional banks provide the bulk of the lending to small and mid-sized businesses and there is fear that the pressure on their deposits and net interest margins will lead to stricter lending terms and fewer loans.  We wanted to point out that Northlake’s financial exposure in the S&P Financial Select Sector ETF (XLF) is minimally exposed to regional banks.  The large positions are Berkshire Hathaway, JP Morgan Chase, Visa, Mastercard, Bank of America and Wells Fargo.  These stocks make up 45% of the fund and are largely unaffected by the turmoil in regional banking.  In fact, the Fed has looked to the largest U.S. banks to purchase the failing regionals. XLF is down about 10% since the Silicon Valley news broke but has rallied about 8% since the recent low.  The S&P Regional Banking ETF made a new low last week when First Republic became the latest bank to collapse.  The S&P Industrial ETF (XLI) has fared better, down just 3% from its recent high.  Leading companies in XLI include defense contractors Raytheon and Lockheed Martin, railroad Union Pacific, machinery giants Caterpillar and Deere, and airplane manufacturer Boeing.  Recent earnings results from these companies have been mixed to positive.  Northlake remains comfortable with the Financial and Industrial themes due to our more sanguine outlook for the economy where we continue to expect no worse than a short, mild recession that is widely anticipated and at least partially built into stock prices.

SPY, IWF, XLF, and XLI 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.