Higher inflation and accelerating unemployment are primary risks for investors as 2025 heads to a close.
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The S&P 500 is up more than 9% this year, but there are many reasons to believe that could change. The President Trump is attempting to influence the Fed, the job market has slowed, and business and consumers are adjusting to a new tariff reality with unknown economic consequences.
Amid the uncertainty, Ayako Yoshioka, portfolio consulting director at Wealth Enhancement, cited two familiar concerns—higher inflation and accelerating unemployment—as primary risks for investors as 2025 heads to a close. She also shared key investing moves to prepare for what lies ahead.
Higher Inflation
Inflation, in terms of changes in the Consumer Price Index, has been above the Fed’s 2% target since March 2021. The inflation rate peaked at 9.1% in June 2022 before slowly pulling back to the current level of 2.7%.
New U.S. tariffs have not yet been linked to major price increases. However, the highest tariffs were implemented in August, and inflation data is only available through July. As Yoshioka pointed out, there is a risk that inflation numbers will rise as corporations begin to pass along their increased costs. An inflation uptick will tighten household budgets and, worse, could dampen consumer spending.
“Consumers are already fatigued after several years of higher prices and economic activity can soften further as consumers pull back,” Yoshioka explained.
Weakening Jobs Market
The unemployment rate as of July was 4.2%. This metric has remained at 4% or higher since May 2024, after staying below 4% for most of 2022 and all of 2023.
While the unemployment rate hasn’t changed dramatically, the rate of new jobs has slowed significantly. The economy added 106,000 jobs between May and July after adding 380,000 in February through March.
Yoshioka notes, “the softening labor market can also dampen economic growth, bringing stagflation concerns back to the forefront.”
Strategies To Protect Your Portfolio
Stagflation is an economic cycle characterized by slow growth, rising unemployment and rising prices. This combination of factors is difficult to address with monetary policy, because higher interest rates can slow inflation but worsen a weak job market. Lower interest rates do the opposite, stimulating jobs while encouraging higher prices.
Yoshioka recommended diversifying into international stocks and inflation hedges, such as commodities, precious metals and real assets. She also says, “maintaining duration flexibility in fixed income can help mitigate issues from rate volatility.” In other words, be open to lower-yielding, short-term bonds.
Price sensitivity is the primary issue for bonds when interest rates are changing. Bonds can lose value when interest rates rise and gain value when interest rates fall. Duration—or how long it takes for the bond to mature—affects how reactive the bond is to interest rate adjustments. Bonds that mature quickly are less price sensitive, and often yield less as a result.
Funds for quick diversification
ETFs offer an easy path to diversify into international stocks, commodities and other inflation hedges as well as short-term bonds. Popular funds in these categories, as measured by assets under management, include:
- International: Vanguard FTSE Developed Markets ETF (VEA) invests in foreign large caps.
- Commodities: Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PBDC) invests in commodity-linked futures, providing exposure to a range of heavily traded commodities.
- Precious metals: Aberdeen Physical Precious Metals Basket Shares ETF (GLTR) owns physical gold, silver, platinum and palladium.
- Real estate: Vanguard Real Estate ETF (VNQ) invests in companies that own and operate real estate. These companies earn rents and benefit when their properties appreciate.
- Short-term bond maturities: iShares 0-3 Month Treasury Bond ETF (SGOV) invests in short-term debt issued by the U.S. government.
Be Ready For Anything
Diversification is the trusted strategy for managing through uncertain economic times. Well-rounded portfolios are less volatile because each asset type responds differently to macroeconomic conditions. Those varying responses often have an offsetting effect that shaves off the most extreme edges of the group’s volatility.
So, get diversified. The end of 2025 could be tumultuous, and it pays to be ready.
