Wealth managers weigh in on inflation numbers, prepare for volatility

For all the talk of tariff-based inflation, the Federal Reserve’s favorite indicator is not reflecting overly painful price hikes hitting the economy. At least not yet.

Still, financial advisors are preparing themselves - and their client portfolios - for the possibility of unwelcome sticker shock.  

The Fed’s closely watched personal consumption expenditures (PCE) price index, which tracks the change in prices of goods and services purchased by US households, was in-line with market expectations today, indicating a continued moderation in inflation. Headline PCE rose 0.1% month-over-month and 2.1% year-over-year, according to the report, while core PCE rose 0.1 percent and 2.5 percent annually, both modest declines from prior readings and very close to the Fed’s 2% target.

There was a shift in contribution from March, however, which saw autos as the largest driver of consumption, to April where services including housing, healthcare and food services were the biggest ticket items. The moderation in goods expectation, however, is expected to reverse later as tariffs show up in the figures, according to Lara Castleton, US Head of Portfolio Construction and Strategy at Janus Henderson Investors.

“This uncertainty around tariffs, and continued stickiness around services, will likely keep the Fed cautious on cutting rates in the next month,” Castleton said.

From a wealth advisor perspective, Brad Doy, co-founder at VestGen Wealth Partners, believes the tariffs will have an increasing impact on the inflation data moving forward. He also sees an “above-average level of volatility” over the near term, given the market is trading at a heady 22 times 2025 earnings.

“With these two headwinds facing the market at the same time, we are advising our clients to brace for short-term declines in the stock markets,” Doy said.

Meanwhile, Austin Graff, chief investment officer at 49 Financial, is prepping his clients for a rising inflationary environment by favoring “high-quality” equities. 

“Over time, high-quality equities tend to be a good hedge against inflation. This includes companies with pricing power, which allows them to raise prices with inflation, preserving margins and profitability,” Graff said, adding that ultimately his goal is to “preserve long-term purchasing power” for clients.

Elsewhere, Todd Mercer, founder and managing partner at Mercer Wealth Management, points out some companies are warning of price hikes. But so far, the actual impact has been muted because many firms rushed to stock up before the tariff deadline hit.

“What we see now is a strategy: the administration appears to be using tariffs not to drive prices up, but to force better trade deals, lowering tariffs on U.S. goods and reducing global barriers. They know that sparking inflation would hurt working Americans, and if that happens, Republicans could lose the House and possibly the Senate in the midterms, making Trump a lame duck. So, while we expect a hard push on negotiations in the short term, we also think they’ll ultimately ease off,” Mercer said.

Mercer emphasized, “Bottom line: our call hasn’t changed, expect inflation to keep trending down, even if the data keeps us guessing from month to month." 

Inflation, uncertainty, and volatility

VestGen’s Doy, co-founder and wealth advisor at VestGen Wealth Partners, believes exposure to defensive positions including consumer staples, value stocks and gold will help soften the volatility caused by inflation concerns within his equity portfolios. He has also increased client exposure to lower beta equity portfolios and minimum volatility funds.

“We believe the key is to stay in contact with our clients and advise them of these portfolio modifications and encourage them to stay the course, given their long-term objectives,” Doy said.

According to Josh Strange, president and founder of Good Life Nova, far too many investors have been worrying about day-to-day or even month-to-month performance. In his view, that’s partly due to the “wild moves” in the Magnificent Seven over the past few years.

“While having a diversified portfolio and investing in businesses you understand may not be in vogue, it’s the best way to make money for investors who have patience and a plan. More specifically, though, if trade tensions between the US and China alleviate and the dollar remains slightly depressed, emerging markets could become more attractive in the short term,” Strange said.

Value has underperformed growth for years, but if inflation remains resilient or perks up again, that trend could reverse itself, said Strange.

Elsewhere, Andrew Graham, founder and portfolio manager at Jackson Square Capital, keeps reminding clients that portfolio diversification – including cash - is key to protecting an account from sector or asset specific risks.

In terms of specific investments, Graham said capital spending on data centers is a long-term strategic priority for a variety of big tech firms. And while capex in this area could slow if the environment sours, the overall trend is too strong for there to be a meaningful pullback, in his opinion.

“Equities tied to semiconductors, networking equipment and the infrastructure related to data centers will remain attractive,” Graham said.

Practice patience

Along similar lines, Mercer still thinks technology and tech-related stocks are “the best sector to be in,” with AI increasingly helping productivity. Elsewhere, he’s a fan of utility stocks because of the rising demand for electricity. On the flip side, Mercer believes the healthcare and energy sectors will struggle. 

“We think investors should be patient with the volatility. Getting emotional about the volatility and politics then making changes is never a good investment strategy. Emotional decisions often cause unintended tax consequences and lower returns. We are focused on the long-term growth of client portfolios and helping clients manage emotions through this turbulent time,” Mercer said.