Small Cap and Value Signals Hold for September
Northlake’s Market Cap model favors small cap for a second consecutive month, while the Style model favors value for an eighth consecutive month. For clients using our model-driven strategies, we are maintaining positions in the Russell 2000 ETF (IWM) and the Russell 1000 Value ETF (IWD).
The Market Cap model reading changed very little during August. A couple of internal stock market technical and trend indicators shifted from small cap to large cap, but the overall recommendation remains small cap.
Steady economic growth continues to support smaller companies. Growth in corporate earnings has also broadened after previously being concentrated among large-cap growth companies. These factors are keeping the model slightly in favor of small cap, although the signal is not strong.
The Style model continues to favor value, although a couple internal market trend indicators moved slightly toward growth during August when oversold artificial intelligence infrastructure stocks, including memory semiconductor and data center suppliers, experienced a trading rebound.
The Market Cap model’s weak small cap recommendation is not enough to support moving from large-cap value to small-cap value. We want to see stronger and more sustained evidence from the small cap signal before shifting from large cap value to small cap value.
Northlake’s thematic strategies that do not use the models directly will remain unchanged for September. Existing holdings in small-cap value, international developed markets, emerging markets, and the U.S. industrials, financials, and health care sectors continue to provide exposure to areas that generally fit the current small-cap and value signals.
Recent Performance
The value signal lost some ground during August but remains up more than 20% this year.
During its first month, the small-cap recommendation added value compared with the mid-cap position that was sold. Small caps still lagged the large-cap S&P 500 over the same period.
Looking Ahead
We are watching whether unusual correlations and historically large stock reactions to earnings results affect the broader bullish market trend. Other areas of focus include rising interest rates across the yield curve, Federal Reserve policy and leadership, renewed concerns about the U.S. budget deficit, the effects of renewed fighting in the Iran war on oil prices and inflation expectations, and weak seasonality in through mid-October.
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.
