Annuities 101: The Key Questions You Need to Ask
June 24, 2022 | 4 min. read
The world’s capital markets are currently going through a period of rapid adjustment. Inflation rates are high, interest rates are rising, bond prices are falling, and the equity markets are correcting. What is going on? Some contributing factors have been well documented: lingering post pandemic lethargy, accommodative monetary and fiscal policy, and an economic demand shock that only exacerbated an already shaky supply chain situation.
These factors seemed to be slowly resolving themselves, though, until an event with the potential to have an even deeper and more enduring impact on the global economy occurred. We are now experiencing a substantial transformation, or what is sometimes characterized as a sea change, in the global capital markets. Put simply, the world appears to be responding to Russia’s invasion of Ukraine by taking a step back from globalization.
Globalization is a term used to describe how trade (services, goods, technology, and knowledge transfer) has made the world into a more connected and interdependent place.[2] It has benefitted many by helping to increase economic growth for more countries and encouraging global cooperation and cross-border investments.[3] Mr. Pierre-Olivier Gourinchas, the Chief Economist at the International Monetary Fund (IMF), stated that globalization has “lifted hundreds of millions out of poverty and allowed emerging market economies to see their economies soar in the last 30, 40 years[.]”[4]
Before I describe this sea change and its potential implications, I need to provide some background on the rise of globalization. As World War II was coming to an end, U.S. leaders assessed the devastation and came to the following conclusions:[5]
Based on these conclusions, the U.S. brought their allies together at a ski resort in Bretton Woods, New Hampshire, and imposed this fundamentally new global economic system. America’s allies were relieved and quickly accepted what came to be known as the Bretton Woods Accord.[6] They did so because they recognized that the U.S. was not pursuing empire status, but instead was proposing a solution that would benefit most stakeholders. The thought behind all of this was that if countries could access economic growth through a free trade system that encouraged cooperation and business competition, nation state wars would become a thing of the past. Nothing secures American national security better than a world at peace as a result of economic interconnectedness.
The United States military alliances and the new global free trade system were the driving forces behind the eventual demise of the Soviet Union (1988-1991) and bringing China into the World Trade Organization (WTO) in 2001. This system “ushered in the greatest era of peace and prosperity in human history. Global GDP [economic output] expanded by a factor of ten. The global population tripled. The massive, civilization-threatening wars of the past . . . all simply stopped.”[7]
Which brings us back to Putin’s war on Ukraine. Russia’s invasion of Ukraine rejected the global free trade system and the notion that nation states can resolve their differences peacefully.[8] The global free trade system is now transforming into something different. What does that look like?
On April 13, Secretary of the Treasury Janet Yellen presented an important speech at the Atlantic Council.[9]
“Yellen described a new world order that is dominated by countries that play by the same rules. Countries that choose not to play by the rules will be treated as pariahs by the abiders. By invading Ukraine in an unprovoked war by choice, Russia has turned itself into a pariah nation among the “unified coalition of sanctioning countries” (UCSC). This league of rules-based countries “imposed an unprecedented suite of financial sanctions and export controls on Russia.” Yellen declared: “We, the sanctioning countries, are saying to Russia that, having flaunted the rules, norms, and values that underpin the international economy, we will no longer extend to you the privilege of trading or investing with us.”[10]
By acting in concert against Russia, the UCSC demonstrated that the sanctions are not driven by the foreign policy objectives of any one nation, but rather in support of certain civilized principles: opposition to aggression, to widespread violence against civilians, and in alignment with a commitment to a rules-based global order that protects peace and prosperity.[11] In the same speech, Yellen called for free but secure trade with countries the U.S. can count on, which should involve a “re-shoring” or “friend-shoring” of global supply chains to trusted countries. She reasoned that the U.S. cannot allow countries to use their market positions in key raw materials, technologies, or products to have the power to disrupt the global economy or exercise unwanted geopolitical leverage.[12] Russia has been quickly and effectively cut off from the global system (banking, access to multi-national companies, shipping systems, etc.).
Indeed, this sea change is already viewed through numerous tectonic geopolitical shifts:[13]
What are the potential implications of this sea change from an economic and investment standpoint?
Over the long term, this sea change will likely have beneficial global impacts, and maybe even turn “into something rich and strange.”[17] Over the short- term, however, it will serve as a source of market and economic volatility. The First Command Investment Team is currently exploring this transformation and its potential implications to position investment portfolios appropriately going forward.
In the meantime, rest assured that our Advisors are trained to utilize the wide range of investment options we offer, to ensure that our clients’ investments are aligned with their financial plan and, just as importantly, to keep them from making rash decisions through inevitable periods of volatility. We at First Command value time in the market versus attempting to time the market and accept volatility as an inherent risk for stock investors, using it to our advantage to improve market returns through dollar-cost-average and opportunistic rebalancing. If you haven’t met with your Financial Advisor recently to review your plan and access your portfolio, we encourage you to do so at your earliest convenience.
Thank you for the confidence you have placed in First Command.
The information in this report was prepared by John Weitzer, Chief Investment Officer of First Command. Opinions represent First Command’s opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. All statistics quoted are as of the date of this publication, unless otherwise noted. First Command does not undertake to advise you of any change in its opinions or the information contained in this report. This report is not intended to be a client specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Should you require investment advice, please consult with your Financial Advisor. Risk is inherent in the market. Past performance does not guarantee future results. Your investment may be worth more or less than its original cost. Your investment returns will be affected by investment expenses, fees, taxes, and other costs.
©2022 First Command Financial Services, Inc. is the parent company of First Command Brokerage Services, Inc. (Member SIPC, FINRA), First Command Advisory Services, Inc., First Command Insurance Services, Inc., and First Command Bank. Securities products and brokerage services are provided by First Command Brokerage Services, Inc., a broker-dealer. Financial planning and investment advisory services are provided by First Command Advisory Services, Inc., an investment adviser. Insurance products and services are provided by First Command Insurance Services, Inc. Banking products and services are provided by First Command Bank (Member FDIC). Securities are not FDIC insured, have no bank guarantee and may lose value. A financial plan, by itself, cannot assure that retirement or other financial goals will be met. 05062
Dollar cost averaging is the practice of investing an equal amount of money at regular intervals, regardless of market performance. The objective of this investment strategy is to reduce the average cost per share by purchasing more shares when prices are low and fewer when prices are high. The illustration below is a hypothetical example of dollar cost averaging and does not represent the past or future performance of any particular investment. While not assuring a profit or protecting against a loss, dollar cost averaging can help remove emotion from investing. But as it involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low price levels
Diversification, asset allocation and portfolio rebalancing do not guarantee a profit or protect against a loss in a declining market. They are methods used to help manage risk. Investment returns and principal value will fluctuate and your investment, when redeemed, may be worth more or less than its original cost. Sales charges and taxes may apply.
Footnotes
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