Moving to Mid Cap and Value as Technicals and Economy Align

Northlake’s Market Cap and Style models produced new signals for February reflecting recent relative strength for small cap, mid cap, and value stocks amid improved economic data in the last couple of months.  A weaker US dollar also helps these themes.  As a result of updated recommendations, client strategies that use our models will shift from the S&P 500 (SPY) to the S&P 400 Mid Cap (MDY) and move the remaining Russell 1000 Growth (IWF) to the Russell 1000 (Value).  As a reminder, we shifted half of IWF to IWD in January.

Beginning last summer, small and mid cap and value themes began performing better relative to the long-running trend in favor of large cap and growth.  The shift got started initially as investors began to worry about whether the Mag7 AI companies would earn a decent return on the massive investments they are making in artificial intelligence.  In addition, AI capital spending is changing the nature of technology growth stocks, making them more capital intensive and less free cash flow positive.

The relative performance trend accelerated in January, shifting the internal trend and technical indicators in both models further in favor of small cap, mid cap, and value.  Economic data reflected in both models external indicators has improved with some stabilization in employment, stable albeit somewhat elevated inflation, and higher GDP growth forecasts.  The alignment of the internal and external indicators suggests the current signals could strengthen and perform well in the months ahead.

MDY and IWD are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts.  Steve is the majority-owner and President of Northlake, a registered investment advisor.  SPY is a core holding for a cross section of Northlake-managed accounts.  Northlake’s regulatory filings can be found at www.sec.gov.