Inflation Report Hands Advisors a 'Nothingburger'

Advisors' challenge: avoid market head fakes, pick the right ETFs.

Reviewed by: Sean Allocca
Edited by: Ron Day

By Rob Isbitts 

The initial market reaction to Wednesday’s monthly Consumer Price Index (CPI) was, to use a not-so-technical term, a “nothing burger.”  

Market observers widely anticipated that the CPI report would shake us out of a trendless period that has occurred through the first half of the notoriously volatile month of September. 

But despite the 0.6% rate of increase for the “all items” CPI during August—which nudged its 12-month rate up to 3.7% for August from 3.2% in July—there was no wild reaction from the market. It didn’t jump on the bullish bandwagon (“The Fed will cut rates soon and it won’t be due to a crisis, so the S&P 500 will hit new highs”) or the bearish one (“Inflation is re-accelerating, just like it did in the 1970s, we’re all doomed!”).  

Is the lack of bullishness disappointing? Not really. But it explains why using a Markets Monitor tool like the one has built offers an ideal way to analyze the methodical drumbeat of each week’s data and events.  

In the wake of the CPI report, advisors and investors can learn about and watch three market areas, and ETFs that represent them, as September continues. 

If you haven’t followed the intense social media chatter about a potential looming “credit event,” here’s a summary.  

Some market pundits see a high risk of something like the events of 2008, where the banking and counterparty system broke down. We saw a hint of this earlier this year when a few banks collapsed—and others would have but for some emergency government intervention. KRE tracks regional banks: the firms in the crosshairs of that March 2023 event.  

Avoid Head Fakes, Pick Good ETFs

The SPDR S&P Regional Banking ETF (KRE) dropped nearly 1% following the CPI report Wednesday morning and has slid about 12% in about the past 5 weeks (though unchanged since three months ago). The same type of move occurred just prior to KRE’s 40% drop from March through early May. That makes the regional banks a sector to keep a close eye on. KRE is off roughly 25% so far this year. 

The Invesco S&P 500 Top 50 ETF (XLG) moved higher after the CPI release and is approaching an all-time high. It has resisted nearly every stock market pullback this year, and is up more than 30% in 2023. 

XLG owns the 50 largest companies from within the S&P 500. Tech certainly has a big presence, at 28% of XLG. That is right in the middle of the S&P 500’s current 29% tech allocation and the Nasdaq 100’s 49% allocation to that sector.  

Flight to Quality

This reminds advisors and investors that many of the biggest companies, while often thought of as big “tech stocks,” are assigned to industries such as consumer discretionary or communication services. The bottom line: The biggest stocks still play the “flight to quality” role as the market tries to get unstuck from the mud. 

Or you can just hang out and earn 5.0%, the rate on 2 Year U.S. Treasury Notes. That rate is up from around 3.8% in April, and 0.7% at the start of 2022. The RBB Fund Inc. - US Treasury 2 Year Note ETF (UTWO) It owns the current 2 Year T-Note, auctioned monthly, at which point UTWO rolls its current position to the newly auctioned bond.  

Reacting to the CPI news Wednesday, the stock and bond markets were just slightly more exciting than they are on a Saturday … when they are closed. This has proven more the norm than the exception, which means advisors and investors must assess not only how to position portfolios for a big bull or bear move, but also how to handle a third scenario: continued stagnation, as in a nothing burger with a side of nothing. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.