Northlake’s Style model flipped to neutral after a three month run favoring growth.  As a result, 50% of client positions in the Russell 1000 Growth (IWF) have been with proceeds were reinvested in the Russell 1000 Value (IWD).  The Market Cap model continues to recommend large cap, so current client holdings in the S&P 500 (SPY) will be held for at least another month.

The shift to a neutral view of growth vs. value came about as a result of better economic data, a rebound in commodity prices, and improved performance of value stocks.  Our quarterly client letter goes into detail on how these trends played out during the first quarter.  Generally, weak oil and commodity prices and emerging market currencies created a negative feedback loop early in the year that led to the initial sharp decline in stocks.  Dovish commentary and policies from the Federal Reserve and European Central Bank in mid-February broke the negativity and mean reversion took place in terms of the global economic outlook and asset prices.  The market now seems more in balance in terms of economic data and internal trends.  Put it all together and a neutral view on growth vs. value makes sense.

While the Market Cap model remains on a large cap signal, there was significant underlying movement toward small cap.  In this case, most of the change occurred in the internal technical and trend indicators.  Four of these indicators moved in favor of small cap reflecting better performance of small cap stocks since the market low in mid-February.  Small caps have benefited greatly from reduced fears about the global economic outlook and future Federal Reserve policy.  If the Market Cap model readings remain mostly unchanged during April, the recommendation would shift from large cap to mid cap for May.

During March, the Style model matched the major market averages as there was little variation in returns of growth and value indices.  Year to date, the Style model is running a little less than 1% behind the S&P 500, reflecting the mean reversion mentioned previously that saw high quality growth stocks sold in favor of low quality value, industrial, and commodity stocks.  The Market Cap model would have been better off on a small or mid cap signal in March but year to date the model is very close to the benchmark S&P 500.  Given the unusual volatility and elevated risks that have been apparent so far this year, Northlake is comfortable being in large caps given their tendency to hold up better in bearish environments.

SPY, IWD, 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.