As I suspected might occur, Northlake’s Style model shifted from Value to Growth for August. The Market Cap model is unchanged for August. It continues to favor Mid Cap. As a result of the new Growth signal, all client positions in the Russell 1000 Value (IWD) have been swapped into the Russell 1000 Growth (IWF). Positions in the S&P 400 Mid Cap (MDY) will be maintained for at least another month.
With just a few exceptions, the Style model has favored Value since mid-2009. The reason is that Value usually performs better in the early to mid-stages of economic expansions. Value includes sectors like financials, industrials, and basic materials. Each of these sectors is cyclical and benefits from the economic strength and bullish Wall Street money flows. The economy began recovering in late 2008 and early 2009 so a Value signal made sense for most of the time since then.
What has changed over the past few months is decelerating economic growth. The economy is still on a positive track but growth has lessened as evidenced most starkly by weaker than expected job numbers. Last week’s weak GDP report clearly revealed the slowdown in the pace of economic recovery. In a lower growth economic environment, growth stocks in sectors like technology and health care make sense because they do not require the strong tailwind of economic growth to produce good earnings or rising stock prices.
Looking back at July, the models performed poorly. MDY fell about 3.5%, worse than the 2.2% loss for the benchmark S&P 500. Value also lagged with IWD also dropping 3.5%, trailing both the S&P 500 and Growth, which fell just 1.3% as measured by IWF.
So far this year, the models have a mixed performance. The yearlong Mid Cap signal has been accurate with MDY the best of major market cap indices, up 4% against 2.9% for the S&P 500 and 1.9% for small caps. The Style model fell short so far in 2011 with the yearlong Value signals up 1.1% against 2.8% for Growth. The just completed Value signal has been in place since December 2010. During that time, Value gained 8.5% and Growth gained 10.3%.
Disclosure: IWF and MDY are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.