Freeman's Blog


June 18th, 2020 by

After losing ground in 2018, U.S. stocks had a banner year in 2019, with the S&P 500 gaining almost 29% — the highest annual increase since 2013.1 It’s too early to know how 2020 will turn out, but you can count on market swings to challenge your patience as an investor.

The trend was steadily upward last year, but there were downturns along the way, including a single-day drop of almost 3% on August 14. That plunge began with bad economic news from Germany and China that triggered a flight to the relative safety of U.S. Treasury securities, driving the yield on the 10-year Treasury note below the 2-year note for the first time since 2007. A yield curve inversion has been a reliable predictor of past recessions and spooked the stock market.2 By the following day, however, the market was back on the rise.3

It’s possible that a yield curve inversion may no longer be a precursor to a recession. Still, larger concerns about the economy are ongoing, and this incident illustrates the pitfalls of overreacting to economic news. If you were also spooked on August 14, 2019, and sold some or all of your stock positions, you might have missed out on more than 13% equity market growth over the rest of the year.4

Tune Out the Noise

The media generates news 24 hours a day, seven days a week, and presents it through television, radio, print, and the Internet. You can check the market and access the news at work, in your car, and anywhere you carry a mobile device.

This barrage of information might make you feel that you should buy or sell investments in response to the latest news, whether it’s a market drop or an unexpected geopolitical event. This is a natural response, but it’s not wise to react emotionally to market swings or to news that you think might affect the market.

Stay the Course

Consider this advice from John Bogle, famed investor and mutual fund industry pioneer: “Stay the course. Regardless of what happens to the markets, stick to your investment program. Changing your strategy at the wrong time can be the single most devastating mistake you can make as an investor.”5

This doesn’t mean you should never buy or sell investments. However, the investments you buy and sell should be based on a sound strategy appropriate for your risk tolerance, financial goals, and time frame. And a sound investment strategy should carry you through market ups and downs.

It can be tough to keep cool when you see the market dropping or to control your exuberance when you see it shooting upward. But overreacting to market movements or trying to “time the market” by guessing at future direction may create an additional risk that could negatively affect your long-term portfolio performance.

1) S&P Dow Jones Indices, 2020
2) The Wall Street Journal, August 14, 2019
3–4) Yahoo! Finance (S&P 500 index for the period 8/14/2019 to 12/31/2019)
5) MarketWatch, June 6, 2017

June 9th, 2020 by

On April 20, 2020, the price of a futures contract for West Texas Intermediate crude — the benchmark for U.S. oil prices — fell below zero for the first time in history, dropping more than 306% in trading on the New York Mercantile Exchange and ending the day at –$37.63 per barrel.1 Essentially, this meant that investors who would soon be obligated to take possession of a barrel of oil were willing to pay someone else to take it instead.

This unprecedented price collapse was for contracts scheduled to expire the following day and require delivery in May. June futures dropped 18% to about $20 a barrel, and the May contract clawed its way back to about $10 on April 21.2–3 But the dramatic plunge below zero highlighted a fundamental problem for the oil industry in the face of evaporating demand due to COVID-19. There is too much oil, and the industry is running out of places to put it.

Supply Without Demand

The International Energy Agency estimates that global demand for oil dropped by 29% in April 2020 compared with 12 months earlier and will drop by an average of 23% for the second quarter — equivalent to losing all of the oil consumption in the United States and Canada.4–5 The historic agreement by Russia, Saudi Arabia, and their allies (OPEC+) to reduce production beginning May 1 — equivalent to about 10% of global production — will help, but won’t be soon enough or large enough to stop the continuing expansion of supply, and storage facilities are filling up fast around the globe.6

The pressure is especially acute on West Texas Intermediate (WTI) crude and other U.S. oil stored for delivery in tanks at Cushing, Oklahoma. Under normal circumstances, oil passes through Cushing to refineries, but with diminished demand, the Cushing tanks are expected to be full sometime in May. Land-locked oil like WTI has nowhere else to go, which is one reason why traders were willing to pay to avoid taking delivery.7

A large exchange-traded fund (ETF) holding crude oil commodity futures contracts also played a major role in the rush below zero. ETFs hold futures strictly as paper investments with no intention or capability of taking delivery of oil — there are no storage tanks on Wall Street; they typically roll each month’s futures contract to the following month. But with no one willing to buy the May contract and accept actual delivery of oil, the ETF was forced to pay to get rid of the contracts. With storage problems likely to continue, June futures may face the same extreme price pressure as May.8

Brent Crude and Floating Storage

Whereas WTI contracts require accepting delivery of oil, contracts for Brent crude — the global benchmark — are settled in cash and unlikely to go negative. However, the physical price of Brent, which is pumped out of the North Sea, is already low and may go lower as storage tanks on the shore fill up, waiting for the oil to be loaded onto tankers. Like WTI, Brent is a high-quality oil, and other grades are typically sold at a discount to the benchmark. If Brent drops to $10, for example, oil from Saudi Arabia or Iraq could be priced below $0.9

The oil glut has created a record imbalance between near-term and long-term oil contracts, as traders anticipate increased consumption in the future. The disparity is great enough that some trading companies are buying cheap oil now and storing it on huge tankers that can carry 2 million barrels of oil.10 It’s estimated that a third of the world’s tanker fleet may be used for storage instead of transportation if the crisis continues.11

Not Worth Pumping

Oil prices are often volatile, but the dramatic drop in 2020 has been extraordinary, driven by the global pandemic shutdown and a price war between Russia and Saudi Arabia. On April 28, after the subzero dive had come and gone, the spot price for WTI — the price actually paid on delivery in Cushing — was $12.40 per barrel, down 80% for the year. The spot price for Brent was $15.60 per barrel, down 77%.12

At these price levels, it is no longer profitable for many producers to pump oil, especially for the more expensive shale-oil production methods used in the United States. In the four-week period ending April 17, U.S. oil production dropped by 900,000 barrels per day, about 7% of production and the largest one-month drop since the Great Recession. Some analysts expect an additional drop of 2 million barrels per day by year-end.13

Layoffs and rig closures have begun and are expected to expand quickly. Although large companies are likely to weather the storm, some smaller producers may be forced into bankruptcy. The U.S. Department of Energy has opened 30 million barrels of storage in the Strategic Petroleum Reserve for lease to private companies — equivalent to about 2.5 days of U.S. production — and plans to accept another 47 million barrels to fill the reserve to capacity; as of late April, no funding to purchase oil was available. Other forms of government support are being considered.14–16

Signs of a recovery in demand for oil in China have sparked some optimism, but the tension between supply and demand will continue to evolve, and extreme price volatility can be expected until the market finds balance through production cuts and/or rising demand.17

For now, keep in mind that oil prices are only one of many factors influencing the markets and the global economy. It’s important to maintain a long-term perspective and continue to focus on your own investment goals.

1–3) MarketWatch, April 20 & 24, 2020
4) International Energy Agency, April 2020
5, 12, 16) U.S. Energy Information Administration, April 2020
6–7) The Wall Street Journal, April 22, 2020
8–9) Bloomberg, April 20 & 22, 2020
10) The Wall Street Journal, April 20, 2020
11), April 22, 2020
13) CNBC, April 22, 2020
14) CNN, April 21, 2020
15) U.S. Department of Energy, April 2, 2020
17) The Wall Street Journal, April 23, 2020

June 3rd, 2020 by

An annuity is an insurance contract that offers an income stream in return for one or more premium payments. Income payments continue for the duration of the contract, which may be for life or a specific number of years.

A fixed annuity offers a set rate of return for the life of the contract. A variable annuity is riskier but offers the potential for growth because a portion of the premium is invested in the financial markets; the annuity’s future value and income payments are largely determined by the performance of the investment subaccounts selected by the account owner.

Guaranteed living benefits are optional riders that can be attached to annuities for an additional cost. Here’s how living benefits might help you address two important retirement risks.

1. Outliving Your Savings

You can receive a lifetime income stream from an annuity in one of two ways: annuitization or withdrawals. When a contract is annuitized, the cash value is converted into a series of periodic income payments based primarily on current interest rates (or market-based returns) and your life expectancy. Control of the account transfers to the insurance company, so you no longer have access to the investment principal.

guaranteed lifetime withdrawal benefit (GLWB) is an optional lifetime income rider that can be attached to a variable annuity. It guarantees that you can withdraw a minimum amount of income from a variable annuity for life without having to annuitize, even if the original account value is depleted. If the markets perform well, the income amount could increase, but it typically cannot decrease unless you take a withdrawal that exceeds the guaranteed withdrawal amount. The remaining account value may be available for other purposes and inherited by your designated beneficiaries after death.

2. Paying for Long-Term Care

Adding a long-term care (LTC) rider to a fixed or variable annuity might help prevent your savings from being depleted by escalating costs. Benefits are typically triggered if you are diagnosed with dementia or are unable to perform two or more activities of daily living such as eating, bathing, and dressing. If care is needed, the payout is increased for a specified period of time or until the account value reaches zero. And if you never need care, you can continue to earn a return on your money. Medical underwriting requirements tend to be more lenient with an LTC rider than with a standalone policy, and you don’t have to worry about future rate increases or the issuer canceling the policy.

Any annuity guarantees are contingent on the financial strength and claims-paying ability of the issuing insurance company. Annuities are not guaranteed by the FDIC or any other government agency. They are not deposits of, nor are they guaranteed or endorsed by, any bank or savings association. Annuities typically have contract limitations, fees, and charges, which can include mortality and expense charges, account fees, investment management fees, administrative fees, charges for optional benefits, holding periods, termination provisions, and terms for keeping the contract in force.

A variable annuity is a long-term investment product designed for retirement purposes. Variable annuities that come with living benefits tend to have more limited investment options. The investment return and principal value of the investment options are not guaranteed and may fluctuate with changes in market conditions. When the annuity is surrendered or annuitized, the principal may be worth more or less than the original amount invested.