Northlake’s models start 2025 favoring mid cap and growth.  We have held mid cap for clients using our thematic models strategy since the beginning of August.  The Market Cap model recommended small cap for December.  However, we decided to go against the model and stick with mid cap awaiting more confirmation since we considered the small cap signal to be weak.  This proved to be a good decision as small cap performed worse than mid cap in December (although both did worse than large cap).  The Market Cap model flipped back to mid cap for January based on the two-month smoothed reading we use.  The one-month reading based solely on December inputs favors large cap indicating a possible shift to large cap coming in February.

The shift toward large cap is driven by a couple factors.  First, interest rates have risen despite the Federal Reserve cutting the rate it controls over the past six months.  Higher interest rates are a negative for small and mid-cap stocks.  In general, smaller companies have more debt than larger companies, so higher interest costs are a negative for relative earnings growth.  Higher rates also raise worries about future economic growth.  Small and midsize companies as a group are more cyclical than large companies, especially given that large cap stock indices are dominated by giant technology companies that have little sensitivity to the economy.  Second, our models purposefully look at stock market trend and technical indicators in order to improve their timeliness.  Given the very weak small and mid-cap performance relative to large cap in December and a similar, long running secular trend, these indicators are now unanimous in favor of large cap.

For January, the Style model shifted from five months at neutral on growth vs. value to recommending growth.  This change was driven primarily by the technical and trend indicators where again there is unanimous support for growth.  Higher rates and their impact on investor perception of future economic growth also favor growth stocks, which do not need the economy to drive earnings and cash flow growth.

As a result of the latest signals, we are shifting current holdings in the Russell 1000 Value (IWD) to the Russell 1000 Growth (IWF).  Current positions in the S&P 400 Mid Cap (MDY) will be held for at least one more month.  We are making no changes to clients using thematic strategies as they remain well diversified across market cap and style which reflects well against the current model signals and the discussion above.

MDY 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