Inflation, The Fed, and Your Investments
By Bill Harmon, CFP®
It’s hard to believe, but this year seems to have gone by faster than most. Where did the summer go? Now that we’re past Labor Day, the run into the new year will be fast and furious. For investors, it is often a tale of two markets — more on that a little later.
Back in April, the big headline was tariffs. Have they gone away? No. Currently, tariffs are being applied to foreign countries to bring manufacturing and new jobs back to the U.S., raise tax revenues, encourage consumers to buy American, and protect U.S. interests. Is it working? That’s still up for debate.
In this article, I’ll address the tariff issue, its relationship to inflation, and the actions the Federal Reserve Bank (“The Fed”) is taking to keep the economy moving forward. I’ll also discuss the potential impact [MS1] on your investment portfolio.
Critics argue that tariff wars inevitably lead to higher inflation. Imported goods cost more, companies pass those costs on to consumers, and economic growth suffers. You probably recall 2022, when inflation surged to 8% and both the stock and bond markets posted negative returns for the year. Typically, when inflation rises above acceptable levels, the Fed raises the federal funds rate to slow borrowing, spending, and ultimately, inflation. That’s the challenge the Fed faces today: inflation remains above its comfort level, but a new problem has emerged — jobs.
The Fed has two primary mandates: to promote maximum employment and to foster stable prices. This means ensuring that anyone who wants a job can find one, while moderating inflation so that consumers can afford goods and services, and businesses have an incentive to borrow and invest.
It is fair to say that inflation has ticked higher because of the tariff environment, albeit slowly. The July headline CPI reading was 2.7% but ticked up to 2.9% as of August. Core CPI went from 3.0% to 3.1%. If inflation hovers around current levels, then that is not necessarily bad for investors. The 50-year average of CPI is 3.6% and the S&P 500 has averaged 12.20% since 1975. We did see the Fed lower the federal funds rate by 0.25% on September 17th. The main reason behind this, in our opinion, is based on the job market decelerating.
So, what about jobs? In recent months, job creation has slowed significantly. In April 2025, 177,000 new nonfarm jobs were added, but by August, that figure had fallen to just 22,000. In addition, the Bureau of Labor Statistics revised job creation numbers for April 2024–March 2025 down by 911,000. This signals that companies expect slowing demand, which could reduce GDP. For investors, weaker sales growth often means weaker earnings growth — and potentially lower stock prices.
But at a 4.3% unemployment rate, things have not fallen off the cliff. There are still around 7 million job openings, but this is a key area to watch the rest of the year. GDP was reported at a 3.8% rate for the 2nd quarter, and the biggest contributor was net exports. That means that we are selling more of our goods around the world than we are buying from other nations. If this becomes a trend, then that should lead to job creation and continued GDP growth, which should be beneficial for investors.
Since “Liberation Day” on April 2 — when President Trump announced sweeping tariffs on many nations — the stock market has been on fire. Initially, markets reacted negatively, with the S&P 500 Index dropping more than 11% in a week before bottoming on April 8. Since then, the Index has climbed more than 30%. For those of you who stayed disciplined and avoided making emotional, politically driven investment decisions, you are much better off.
So far, corporate America hasn’t shown signs of slowing. The 500 largest U.S. companies reported Q2 2025 revenue growth of 6.1%, marking the 20th consecutive quarter of growth. Earnings grew around 12% in Q2 — the third straight quarter of double-digit growth. For now, tariffs, sticky inflation, and Fed uncertainty haven’t derailed markets, which continue to push toward all-time highs.
When thinking about portfolio allocation, we at Vista Investment Partners continue to emphasize diversification. In 2025, this strategy has proven valuable, especially as the “Magnificent 7” cannot lead markets indefinitely. Much of their performance has been fueled by enthusiasm around AI, similar to how the internet drove the 1990s bull market. Eventually, these stocks may get repriced, creating opportunities elsewhere.
Diversification also matters because tariffs, inflation, and potential Fed rate cuts have pressured the U.S. dollar lower against foreign currencies. As of October 1, 2025, International Developed Markets (Europe and Japan) have outperformed U.S. returns, posting a YTD return of 24.9% compared to the SP 500 at 14.4%, while Emerging Markets (China, India, Brazil) are up 27.6% respectively. If the dollar continues to weaken, foreign markets are likely to benefit further. We do not just diversify our portfolio outside of the US, but it is also important to do so inside the US. With the recent Fed rate cut and the anticipation for more cuts over the coming months, small-cap stocks have been outperforming the S&P 500 in Q3, 12.24% to 7.39%. We believe that the Mag 7 stocks are going to continue to deliver returns, but their earnings growth rate is slowing, as there is opportunity elsewhere.
In summary, 2025 has been another strong year for investors. Year-to-date, the S&P 500 is up double digits, small-cap stocks are gaining momentum, and foreign markets are up more than 20%. Even the bond market has participated, with the U.S. Treasury and Corporate Bond Index (AGG) near 6% YTD.
Looking ahead, the job market remains the most important signal of a potential slowdown and is clearly influencing Fed policy. There is an old saying, “don’t fight the Fed”, and consensus suggests more cuts will follow into 2026. This would likely benefit bond portfolios also, as bond prices rise when rates fall.
Tariffs had an early negative impact on markets, but that has faded as the year has progressed. Inflation has been steady around 3%, and with the Fed likely to provide stimulus through rate cuts, our strategies have investors positioned well.
The best thing you can do is ensure your allocation matches your risk tolerance. Beyond that, focus on what you can control. As always, we are here to partner with you, discuss your strategy in depth, and keep you in the right portfolio — so you can sleep well at night, enjoy the present, and feel confident about your future.
