Last month, we shifted our recommendations for both Market Cap and Style in our model-driven thematic strategies. We moved to neutral on growth vs. value and switched from large cap to mid cap for Market Cap. These changes were recommended by our models and consistent with our views on the market outlook over the next few months. After fresh updates, our models suggest no change and we concur with these thematic recommendations. Client portfolios that use Northlake’s models will continue to own the S&P 400 Mid Cap (MDY) for market cap exposure and equally weighted positions in the Russell 1000 Growth (IWF) and Russell 1000 Value (IWD) for at least one more month. ETF-driven portfolios already have exposure to small and mid cap and growth and value and require no changes.

During August, the stock and bond markets pulled back after big gains in July. The declines accelerated in both markets after Chairman Powell indicated the Federal Reserve would continue its path of raising interest rates and tightening monetary policy even if it risked a recession. For Northlake, this news was not surprising. Investors viewed it as hawkish, especially following a dovish review of the last Fed pronouncements and better than feared set of quarterly earnings and guidance commentary reported in July and August. Northlake’s focus for equities is on the outlook for corporate earnings. We see risk but not to the extent the stock market appears to be discounting. We think consumer spending will hold up better due to strength in the jobs market and corporations are getting ahead of any top-line weakness with cost cutting. For bonds, we think interest rates are nearing their peak now that investors have accepted a hawkish Fed policy well into 2023.

Recent client portfolio activity reflects the moderately cautious view of the markets Northlake has maintained during 2022. Our most recent individual stock purchases, Walmart and T Mobile USA, have defensive characteristics with less exposure to weaker economic activity. We have also moved cash to short-term Treasury bills to take advantage of the inverted yield curve and maintain optionality in the volatile financial market and geopolitical environment. One trade we are considering is moving out to two years in the bond market as yields in this range push north of 3.5% and possibly toward 4%. Bonds are used mostly in balanced portfolios, and the ability to safely lock in returns in this range supports the growth, income, preservation and overall risk-reward strategy appropriate for clients using balanced strategies.

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