Rare Shift to Small Cap for August
Northlake’s Market Cap model is shifting from mid cap to small cap for August, while the Style model continues to favor value for a seventh consecutive month. For clients using our model-driven strategies, we are selling the S&P MidCap 400 ETF (MDY), buying the Russell 2000 ETF (IWM), and maintaining the Russell 1000 Value ETF (IWD). This is the Market Cap model’s first small-cap recommendation since 2024. Since the pandemic began, small cap has been recommended only about 15% of the time, making this a relatively uncommon shift in positioning.
The move to small cap reflects the strength of smaller company stocks in recent months. Almost all of the model’s internal stock market technical and trend indicators have shifted toward small cap. July’s rotation away from a narrow group of mega-cap artificial intelligence leaders reinforced that change, with small- and mid-cap stocks participating more fully in the market’s advance and breadth improving meaningfully.
The model’s external indicators changed less, but they remain supportive of small caps. Economic and earnings data continue to point to resilient growth, an environment that can benefit smaller companies because their results are generally more sensitive to domestic business conditions. The model does not respond to one month of relative performance alone. The recommendation changed because the recent improvement was broad enough and persistent enough to move the underlying indicators.
The Style model continues to favor value. Internal indicators moved further toward value during July as value stocks continued to outperform growth stocks. External indicators also strengthened in value’s favor, reflecting solid economic growth and a market environment that has become less dependent on a small number of large growth companies.
The current readings also remain consistent with Northlake’s thematic strategies. Existing holdings in small-cap value, international developed markets, emerging markets, and the U.S. industrials, financials, and health care sectors provide exposure to areas that generally fit the current small-cap and value signals. No changes are being made to those positions solely because of this month’s model update.
The long-running value recommendation has performed well. Over the six months the current signal has been in place, value has gained approximately 14%, compared with about 1% for growth and 4% for the S&P 500.
The mid-cap position being closed lagged the S&P 500 by roughly two percentage points. Even with that result, the Market Cap model is approximately three percentage points ahead of the S&P 500 benchmark year to date.
The primary question is whether better stock market breadth will continue. We will also monitor the historically weaker seasonal period from August through October and the potential effects of the midterm election on expectations for economic and regulatory policy.
Northlake Capital Management, LLC is a state-registered investment adviser. Registration does not imply a certain level of skill or training. Additional information about Northlake, including current registration status, is available through the SEC’s Investment Adviser Public Disclosure website. This material is for informational purposes only and is not investment advice or a recommendation to buy or sell any security. Investing involves risk, including possible loss of principal. Past performance does not guarantee future results. Northlake, its employees, and clients may hold positions in securities referenced. Opinions are as of the publication date and are subject to change without notice.
