Market Cap Model Shifts to Large Cap for November
Northlake’s Market Cap model is shifting from mid cap to large cap for November, while the Style model favors value for a tenth consecutive month. For clients using our model-driven strategies, we are selling the S&P MidCap 400 ETF (MDY), buying the S&P 500 ETF (SPY), and maintaining the Russell 1000 Value ETF (IWD). There is no change to the current position in the Russell 1000 Value ETF (IWD).
The move to large cap follows two consecutive months of weakening Market Cap readings. The model favored small cap in September, moved to mid cap in October, and now favors large cap. The latest change reflects a further shift in the external economic and financial indicators. Six of the seven active indicators now favor large cap, compared with five last month. The latest shift came from an indicator tracking the broader economy, adding to existing large-cap signals from interest-rate expectations, the yield curve, and other financial measures.
Smaller companies often have less financial flexibility and can be more sensitive to borrowing costs and changes in economic conditions. Larger companies generally have more diversified businesses, greater access to capital, and stronger balance sheets. The model is not forecasting an economic downturn, but its current readings suggest that the investing environment is more favorable for larger companies.
The Style model moved even more firmly into value for November. The most meaningful development came from the stock-market indicators reflecting strong performance for value stocks in October as the market rotated away from AI stocks. The economic and financial indicators also continue to favor value, reflecting a growing but uneven economy.
Model Performance
October was a good month for both of our model strategies. Our Market Cap strategy, which favored mid-sized companies, gained 1.5%, while our Style strategy, which favored value stocks, gained 4.3%. Both comfortably outperformed the S&P 500, which declined 0.9% during the month. On a year-to-date basis, the Style model is now up over 20%, twice the return of the S&P 500. The Market Cap model is up 9% slightly lagging the S&P benchmark.
Non-Model Thematic Strategies
For clients using thematic strategies but not following our models, we continue to hold positions in industrials, financials, and health care. We also continue to maintain exposure to international markets. These sectors complement our Style model’s preference for value stocks, although each also has its own investment drivers. October was particularly strong for health care, which gained nearly 10%, while financials rose about 6% and industrials were essentially flat. These moves reflect the rotation away from the AI trade. International markets had a tougher month. Developed markets slipped about 0.5%, while emerging markets declined by nearly 9%. Emerging markets were dragged lower by poor performance in China and a collapse in the AI semiconductor dominated South Korean market.
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.
