A silver lining in prolonged market volatility: Insights from Denise Chisholm - August 13, 2026
Fresh CPI data shows headline inflation running at 3.4%, keeping price pressures in focus. Yet according to Denise Chisholm, Director of Quantitative Market Strategy at Fidelity, the defining feature of the current market cycle may not be inflation itself but the unusual persistence of volatility. While market swings have tested investors' patience, Denise noted that history offers a more constructive perspective. She also pointed out that some underlying inflation measures may be closer to the Federal Reserve's target than headline data suggests, shifting attention to a different challenge: slowing wage growth.
Here are some of the key points from her commentary.
Looking beyond the headline inflation numbers
Headline inflation measures remain elevated, but underlying trends appear more moderate. The Consumer Price Index (CPI) and Producer Price Index (PPI) both feed into the Personal Consumption Expenditures (PCE) deflator, the Federal Reserve's preferred inflation measure. Based on recent data, Denise estimated that core PCE is currently running at roughly 2.5% on an annualized basis. While still above the Federal Reserve's 2% target, she noted that the trend is decelerating and showing limited evidence of broad-based price pass-through. She also highlighted the role of shelter costs in inflation calculations. According to Denise, measures excluding shelter are running closer to the Federal Reserve's target, with core CPI excluding shelter currently below 2%. As a result, different inflation measures may be telling a more balanced story than headline figures alone.
Why changes to the PCE calculation matter
Beyond the latest inflation readings, Denise pointed to upcoming methodology changes that could influence how inflation is measured. Historically, CPI has tended to run about 50 basis points higher than the PCE deflator. This cycle has been unusual because that relationship has reversed. Two components have contributed to the difference: portfolio management fees and software prices. Portfolio management fees, which are linked to equity market performance, have had a meaningful influence on recent PCE readings. Denise noted that roughly half of the expected monthly increase in PCE is attributable to these fees rather than broad-based inflation pressures. At the same time, the software component, which draws from a relatively narrow CPI sample, is being revised through a broader data set. These methodology updates could lower year-over-year core PCE readings by approximately 0.2 to 0.4 percentage points. If that occurs, she noted that core PCE could move closer to the Federal Reserve's target range.
The challenge for consumers may be wage growth
While inflation remains a concern for households, slowing wage growth may be a more significant issue for consumers. Nominal wage growth continues to decelerate across income groups and across multiple measures, including average hourly earnings and the Employment Cost Index. In her view, this suggests that what is often described as a tight labour market is not translating into stronger wage gains. If underlying inflation continues to moderate, real income growth will depend increasingly on wage growth improving. Denise noted that several leading indicators point toward conditions that could support stronger wage growth over time.
What volatility may be telling investors
Market volatility has been a defining feature of the past several years. Denise measured volatility using the standard deviation of monthly returns within a quarter, which she described as a way of capturing the fluctuations investors typically experience in their portfolios. Recent readings have reached top-decile and, at times, top-2% historical levels. What stands out most, however, is not the magnitude of volatility but its duration. Markets have repeatedly returned to elevated volatility levels over the past three years, creating one of the most prolonged stretches of turbulence on record. Despite the discomfort volatility can create, Denise pointed to a historical pattern. Historically, periods of elevated volatility have been associated with higher odds of positive market performance over the following 12 months. In her view, volatility is part of the trade-off investors make in pursuit of long-term equity returns. For investors focused on total return, Denise said she views elevated volatility as a positive signal rather than a negative one. For those seeking a smoother investment experience, she noted that solutions-based strategies may offer a way to reduce volatility, though typically with a trade-off in return expectations.
A different approach from the Federal Reserve
Markets have also been adjusting to leadership changes at the Federal Reserve. History suggests that the first year under a new Fed chair is often accompanied by increased bond market volatility. Markets frequently test new leadership, and that periods of adjustment are relatively common. She is also less concerned about changes in communication style than some market observers. Looking at historical data, Denise noted that periods with less forward guidance from the Federal Reserve were associated with more volatility, but not necessarily less effective policy outcomes. In her view, forward guidance has not always proven highly predictive. Looking ahead, she would not be surprised to see policymakers place greater emphasis on a range of inflation measures rather than relying heavily on a single point estimate. Given the variety of ways inflation can be measured, Denise noted that a broader range-based approach could provide a useful way of assessing inflation trends.
Areas of opportunity across sectors
Top sectors: Technology, materials and industrials. Denise continues to favour economically sensitive sectors, with technology remaining her top sector view following the recent correction in semiconductors and artificial intelligence-related stocks. Materials and industrials round out her top three, while she also sees opportunity in housing-related consumer discretionary names and remains broadly positive on financials.
Bottom sectors: Energy, utilities and consumer staples. Denise remains cautious on these sectors, citing the risk-reward outlook for energy and favouring economically sensitive sectors over more defensive areas of the market given what she views as a durable economic cycle.
Conclusion: patience through persistence
While markets continue to navigate inflation concerns, shifting Federal Reserve expectations and ongoing volatility, Denise highlighted several themes shaping the current market environment. Some underlying inflation measures appear closer to target than headlines suggest, while wage growth remains a key variable to monitor. Historically, periods of elevated volatility have often been associated with higher odds of positive market returns over the following 12 months.
