Our 2022 stock market outlook calls for lower than average but positive stock market returns with greater downside risk.  For bonds, we anticipate higher interest rates in the 5-to-10-year maturity range we typically use in client accounts.  In order to best align client accounts with our outlook and the latest signals from our Market Cap and Style models, we are shifting certain client account strategies in favor of large cap and value.  Client accounts that use our models are selling the S&P 400 Mid Cap (MDY) and reinvesting into the S&P 500 (SPY).  Since we have been neutral on growth vs. value, we are now selling the Russell 1000 Growth (IWF) and buying the Russell 1000 Value (IWD).  Client accounts that use thematic ETFs but not our models already have significant exposure to large cap and value but we are reviewing holdings to see if any trades are necessary.

Our models had been shifting toward large cap and value prior to the latest update.  With further upward pressure on interest rates and inflation in January and heavy rotation in themes impacting stock market trends, the models crossed the line to the new large cap and value recommendations. 

The new favored themes are consistent with our market outlook that was attached to client letters sent in the first half of January.  A lower-return, higher-risk stock market in 2022 supports large cap and value, which usually have less volatility than small and mid cap and growth.  The shift in Federal Reserve policy from accommodation to tightening also should help value. Tightening monetary policy in response to elevated inflation hurts growth stocks that are valued based on very long-term forecasts where a higher discount rate compresses valuation.  Furthermore, higher inflation accompanied by our forecast for continued above pre-pandemic economic growth helps cyclical value companies.

These trends were evident in the big January stock and bond market corrections.  The sharp stock market rally during the last two days of the month provides a good opportunity to complete these shifts since it was led by the large cap growth heavy NASDAQ.

SPY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. MDY iis held in select Northlake client accounts.  Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov.