Northlake’s Market Cap model shifted from large cap to mid cap for August.  This change occurred primarily due to the significant outperformance of small and mid cap stocks during July.  Technical and trend indicators are half the weight in our models.  These factors have predictive value and help the timeliness of the recommendations since the economic and interest rate data that provides the other half of the model weight are longer term in nature.  There is a no change to the neutral reading for the Style model, which is neutral on growth vs value for the third consecutive month.  As a result of the latest signals, clients using Northlake’s model strategy will swap from the S&P 500 (SPY) to the S&P 400 Mid Cap (MDY).  Style exposure will continue to be split between the Russell 1000 Growth (IWF) and the Russell 1000 Value (IWD).

As outlined in our monthly Market Commentary emailed to clients on August 1^st, there was a massive rotation from large cap to small and mid cap and from growth to value during July.  Variance in performance a month ago in these themes hit historic highs.  Several developments drove the rotation from large cap growth to small cap and value.  First, there is concern that the heavy capital spending required for artificial intelligence will not have a near-term pay off in revenue and earnings.  This has led to profit-taking in the tech stocks that dominate the NASDAQ.  Second, interest rates began coming down again at the start of July with the 10-year Treasury yield falling from 4.5% to under 4.2%.  At the same time, the yield curve began to steepen with short-term rates falling even faster.  The interest rate moves are due to increasing expectations that the Fed will begin cutting the Federal Funds rate, possibly more aggressively due to a resumption of improving inflation and some weaker economic datapoints from the government and corporate commentary.  Yesterday, the Fed confirmed the likelihood of a rate cut in September

The rotation has been favorable for Northlake’s thematic strategies that use core index ETFs and thematic ETFs where we have maintained exposure to small cap, value, and international (also been outperforming since the rotation got underway) even when our models have not confirmed.  Sector ETFs in industrials, financials, and health care also have been working given their value bias. Clients also benefitted from the Market Cap model moving from growth to neutral at the start of June, which led to a shift from 100% growth to 50/50 growth and value.

SPY, 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