U.S. inflation, as measured by the headline Consumer Price Index (CPI), once again climbed higher than expected in June.
Headline CPI over the past year has climbed by 9.1%, the highest level in over four decades, versus expectations of 8.8%. Core CPI, which excludes food and energy, was down slightly on a year-over-year basis, but the month-over-month figure climbed higher, driven by vehicle prices, medical services, and rents, Kristina Hooper, chief market strategist for Invesco, wrote in a recent insight.
“While month-over-month changes indicate a quickening pace of inflation, bond market expectations for inflation have fallen in recent days, and oil prices are now below $96 per barrel,” Hooper wrote. “However, inflation at multi-decade highs nevertheless places further pressure on the US Federal Reserve (Fed) to tighten policy and restore price stability.”
As inflation has quickened, markets have been signaling that the economy is in a slowdown phase as the Fed tightens policy and consumers grapple with falling real incomes, according to Hooper.
“In this phase of the cycle, we still favor equities but recognize that volatility persists as policy remains uncertain, returns become more modest, and the range of outcomes within equity indices becomes more extreme,” Hooper said.
Investors may want to stay particularly well diversified in the current environment. The S&P 500 Equal Weight Index is a size-neutral version of the S&P 500, weighting each constituent company equally so that a small group of companies does not have an outsized impact on the index — a methodology that has paid off in the current market environment, characterized by higher volatility and wide disparity among sectoral performance.
Investors can gain exposure to the S&P 500 Equal Weight Index with the Invesco S&P 500 Equal Weight ETF (RSP). RSP, which has $29.3 billion in assets under management, charges a 20 basis point expense ratio. The fund has seen $3 billion in net inflows year-to-date, according to VettaFi.
With quarterly rebalances to maintain equal weightings, RSP’s methodology imposes a strict “buy low/sell high” discipline, trimming allocations to companies that have grown and increasing allocations to companies that have underperformed, according to Invesco.
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