Details for UBS FINANCIAL SERVICES-BURISH - Ad from 2021-06-06

Are you ready for higher inflation?
by Andy Burish, founder and managing director of The Burish Group
The global economy that emerges from the pandemic
recession is unlikely to resemble any that came before.
Some countries, companies, industries, sectors and
population groups might come out of the crisis
stronger, while others could struggle to adjust to a
post-COVID world.
But the biggest change to the overall investment
climate might be the newfound willingness of the
Federal Reserve to tolerate higher inflation as the
economy reopens and consumers eagerly spend their
pandemic savings on what could be a shrunken supply
of goods and services.
For you as an investor, those shifts in consumer
behavior and decades-long monetary policy could be
real game changers due to their impact on inflation.
Tough times
To anyone living through the so-called Great Inflation
of the mid-20th century1, the idea that fast-rising
consumer prices could be a good thing might seem
unfathomable. From the mid-1960s through about the
mid-1980s, broad-based inflation rose at unacceptably
high rates, and stock and bond prices went
nowhere—unless, that is, they were going down.
By 1980, the combination of unemployment and
inflation—dubbed the misery index—had surpassed
20%.2 In response, Federal Reserve Chairman Paul
Volcker took drastic action. The Fed clamped down
on the money supply and forced interest rates into
the stratosphere.
Those tight-money policies caused a severe recession,
but also seeded a generation-long rally in financial
assets.3 Eventually, falling inflation allowed the Volcker
Fed to cut borrowing costs, making it easier for
businesses to plan and households to make ends meet.
Mortgage rates fell sharply, boosting the all-important
housing sector.4
From an investment perspective, falling inflation and
the low interest rates that followed made the future
cash flows of public US corporations—the bedrock
formula for valuing a company’s share price—appear
more attractive in current dollars.5
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So, then, what’s the problem?
For one thing, there can be too much—or in this
case, too little—of a sometimes good thing. Since
the end of the global financial crisis in 2009, inflation
in the US has usually ranged between one and two
percent,6 a level that provided the Fed with little room
to push borrowing costs lower to cushion economic
downturns, like the one that hit abruptly last year.
Rethinking policy
The pandemic recession seems to have been the
catalyst for the Fed to make the first significant policy
change since Volcker’s “tough love” approach of the
early 1980s.
For several years, the Fed had targeted an inflation
rate of two percent. The goal was rarely achieved,
yet signaled that interest rates would rise if consumer
prices exceeded that level.
Or even before inflation exceeded that level.
As the unemployment rate kept tumbling toward a
50-year low—but with inflation still running under
two percent—the Fed relied on a theory known as the
Phillips Curve that purported to connect a tight labor
market to consumer cost pressures. Fearing a return
of inflation as more Americans found work, the Fed
raised interest rates nine times beginning in 2015.7
And then came Covid-19.
Speaking virtually at the annual Jackson Hole,
Wyoming, Conference last summer, Fed chair Jerome
Powell said that monetary policymakers would shift
to an inflation-averaging approach to setting rates. In
other words, inflation would be allowed to exceed two
percent by a roughly equal amount that it had lagged
the two percent threshold, even if the labor market
was running hot.8

What “reflation” means for you
Higher inflation could impact your investments in
various ways.
For bondholders, those fixed interest payments will
buy fewer goods and services. That, in turn, could
cause the market value of the bonds to decline,
especially if consumers think that higher inflation is
here to stay.
The formulation for equities is trickier.
Corporate profits are calculated in current (not
inflation-adjusted) dollars, which in theory could
be good for stocks. Our UBS research has found,
however, that markets assign profits a lower value as
inflation rises above two percent, and especially as it
crosses above three percent.10
For investors, the changing inflation landscape means
that asset allocation strategies that worked well in the
past might need to be revisited. The key questions are
how high inflation will go, how long the price spikes
will last, and what the Fed will do if inflation overstays
its welcome.
That makes now a good time to adjust your
portfolio to reflect the higher inflation that’s likely
in a post-COVID economy. Call us today to start the
conversation.
Andrew Burish is a Financial Advisor and Managing
Director at UBS and can be reached at 608-831-4282
or andrew.burish@ubs.com.

Higher inflation already is here. In March, consumer
prices were 2.6 percent higher than a year earlier.9
Economists at UBS now project US inflation to reach
2.8 percent this year, more than double the 2020 level.

https://files.stlouisfed.org/files/htdocs/publications/review/05/03/part2/Meltzer.pdf.
https://www.brookings.edu/blog/brookings-now/2016/01/11/misery-index-at-lowest-levelsince-1950s/.
https://www.stlouisfed.org/publications/regional-economist/january-2005/volckers-handlingof-the-great-inflation-taught-us-much.
Ibid

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Andrew Burish, CIMA®
Managing Director
andrew.burish@ubs.com
The Burish Group
UBS Financial Services Inc.
8020 Excelsior Drive, Suite 400
Madison, WI 53717
608-831-4282

https://www.investopedia.com/terms/p/presentvalue.asp.
https://www.usinflationcalculator.com/inflation/historical-inflation-rates/.
https://www.federalreserve.gov/monetarypolicy/openmarket.htm.
https://www.cnbc.com/2020/08/27/jerome-powell-fed-speech-live-updates.html.
https://www.bls.gov/news.release/pdf/cpi.pdf.
“The Allocator—European Equity Strategy.” UBS. April 16, 2021.

advisors.ubs.com/burishgroup

Andrew Burish is a Financial Advisor with UBS Financial Services Inc.,8020 Excelsior Drive, Madison, WI. Any information presented is general in nature and not intended to provide individually tailored investment advice. Investing involves
risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of UBS Financial Services Inc. As a firm providing wealth management
services to clients, UBS Financial Services Inc. offers investment advisory services in its capacity as an SEC-registered investment adviser and brokerage services in its capacity as an SEC-registered broker-dealer. Investment advisory services
and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. It is important that clients understand the ways in which we conduct business, that they carefully read
the agreements and disclosures that we provide to them about the products or services we offer. For more information, please review the PDF document at ubs.com/relationshipsummary. CIMA® is a registered certification mark of the
Investments & Wealth Institute™ in the United States of America and worldwide. © UBS 2021. All rights reserved. UBS Financial Services Inc. is a subsidiary of UBS AG. Member FINRA/SIPC. VIP_05122021-1 Exp.: 05/31/2022

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