Archive for category: Models

We are sticking with our recommendations for Large Cap and Growth after reviewing the latest output from Northlake’s Market Cap and Style models.  For client assets following the models, this means we will hold the S&P 500 (SPY) and the Russell 1000 Growth (IWF) for at least another month.  Clients using thematic strategies but not Northlake’s models have exposure to Large Cap and Growth through SPY along with the NASDAQ 100 (QQQ).

Both models remain firm in their current recommendation, although each signal is a little weaker.  The changes in underlying factors are concentrated in the external factors.  These indicators are picking up a weaker economic outlook.  A weaker outlook eventually favors small cap and value as the time to invest in these more cyclical sectors is when the economy is bottoming since the stock market discounts the future.  The weaker outlook supports our continued ownership of value sectors like financials and industrials in thematic strategies.  International exposure is also favored as a value play.  We also still like health care for its defensive characteristics and ability to grow in weaker economic environments.

SPY and IWF 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.

Volatility in the financial markets and economy during March triggered a shift in the recommendations from Northlake’s thematic models.  For the first time since September 2020, the Style model is recommending growth.  The model signal had been value or neutral for two and a half years.  The Market Cap model shifts back to large cap after three months at mid cap.  In both models, there are technical/trend and fundamental factors driving the changes.  As a result of the new signals, we are selling the S&P 400 Mid Cap (MDY) and the Russell 1000 Value (IWD) and reinvesting the proceeds into the S&P 500 (SPY) and Russell 1000 Growth (IWF) for client accounts using the models.  For client accounts using thematic strategies executed with ETFs, changes are under review.

Outperformance by large caps and growth was already underway prior to the banking crisis triggered by Silicon Valley Bank.  The Fed response and investor views that the crisis increased the chances of a recession led to a sharp shift downward in interest rates across the yield curve.  The Fed pushed back on investor sentiment by raising the Federal Funds rate in March and indicating that rate cuts are unlikely before next year.  Nonetheless, the bond market rally leading to lower interest rates has mostly held.  With financial markets now anticipating lower interest rates and a more likely recession, history suggests that large cap and growth should outperform in the months ahead.  Large cap benefits in weaker economic environments due to a lower weighting in cyclical stocks and having stronger balance sheets across economic sectors.  Growth stocks benefits due to the ability to produce earnings growth without an economic tailwind.

SPY and IWF 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.

Northlake’s thematic model recommendations are unchanged for December. The Market Cap model again favors large cap after last month’s change from mid cap. The Style model begins a fifth consecutive month at neutral between growth and value. Client portfolios that use Northlake’s models will continue to own the S&P 500 (SPY) for market cap exposure, while style exposure will remain split between the Russell 1000 Growth (IWF) and the Russell 1000 Value (IWD).

The Market Cap model had underlying movement back toward mid cap despite the large cap signal this month. The internal factors have been progressively moving toward favoring small cap for the last two months. However, the external factors have mostly remained steady in suggesting large cap. Relative performance of small cap has been improving, and better market breadth also favors a move back toward small cap. But measures of short-term market sentiment have become more optimistic, which could favor defensive large cap companies if investors begin to reverse their views. Recently, lower interest rate expectations have become a support for smaller companies which tend to be more sensitive to changes in borrowing costs. We expect the combined model could shift back to mid cap as soon as next month.

The fifth neutral reading in a row for the Style model belies choppy changes among the individual factors. Several internal factors moved toward favoring value from the November reading, showing that value has recently been outperforming growth. One external factor related to the weakening US dollar shifted to favor growth, with the falling dollar suggesting a slowing economy that would benefit growth companies that don’t rely on economic growth for increasing profits. Overall, the model shifted toward value, but we expect the model to remain neutral until the fundamental and technical aspects come into balance.

SPY, 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.

Despite weak and volatile markets in September, we are sticking with our preferences for mid cap and neutrality on growth vs. value.  The September decline in stock and bond markets was broad-based with little variation in performance across market cap, style, sectors, and industries.  Northlake believes the market ended September oversold vs. our expectation for no worse than a normal contraction in economic activity and earnings in the next three to six months.

Northlake was quiet in equity trading during September, while we were active in fixed income.  After hawkish back-to-back Federal Reserve events (Powell’s Jackson Hole speech and the September meeting), interest rates across the yield curve moved up to levels last seen more than a decade ago.  Significantly, the U.S. Treasury yield curve once again offered good buy and hold returns of plus or minus 4%.  For the investment objectives and risk tolerance of most Northlake clients, the ability to lock in 4% returns on a portion of their assets makes a lot of sense.

Our initial approach was to invest excess cash reserves in 3-, 6-, and 12-month Treasury bills.  In isolated cases, we purchased 2-to-5-year Treasury bonds. These investments earn a good return against a volatile and uncertain economic and geopolitical outlook and produce a yield well above current money market rates.  The Treasury bills are also extremely liquid should an alternative use of cash reserves become necessary.

In the last few days of September, U.S. Treasury rates fell after the Bank of England made a policy change that relieved stress on global yields.  With the Federal Reserve likely to push the Federal Funds rate to around 4.5% over the next six months, Northlake will evaluate reinvestment opportunities as the Treasury bills mature with an eye toward locking in yields in the 2-to-10-year range.  We also have the option of investing cash in individual stocks or index funds if the stock market environment stabilizes.   We are seeing a lot more opportunity in quality stocks after the 25-35% declines in the major averages so far this year.