The domestic equity market’s bout with extreme volatility continued last week, despite unprecedented action from the Federal Reserve, coordinated monetary efforts from the other major central banks, and a stimulus bill making its way through the U.S. Congress that would amount to nearly $2 trillion of direct economic support from Washington. The market’s response to this fiscal and monetary action was to close out the week with the S&P 500 returning -3.4% on Friday (with a selloff of -2.9% in the last 33 minutes of trading), and crude oil futures similarly seeing a one-day loss of -4.8%.
Securian AM Market Volatility update March 30, 2020
Recent Market Commentary
|Securian AM Dynamic Managed Volatility||80.3%||20.0%||80.8%||19.0%||57.8%|
|Securian AM Managed Volatility Equity||99.0%||13.6%||99.6%||13.6%||74.6%|
|Securian AM Managed Volatility S&P 500||141.0%||29.1%||141.6%||26.9%||99.2%|
|S&P 20 Day Trailing||6.5%||97.1%||97.1%||6.5%||57.3%|
Source: Bloomberg, Securian Asset Management, Inc.
This most recent week in the domestic equity market saw realized volatility continue to creep higher. The S&P 500 one-month realized volatility as-of market close on Thursday and Friday were the 11th and 12th highest values ever (of over 23,000 historical S&P 500 business days), and these are only surpassed by values from a ten-day period in November 1929.The present market gyrations are genuinely staggering.
Over the course of the week, the S&P 500 returned 10.3%, ostensibly in recognition of the monetary policy commitments announced by the Federal Reserve on Monday. On Thursday, the Initial Jobless Claims number, maintained by the U.S. Department of Labor, came out at 3.3 million. This week-over-week increase in unemployment claims eclipsed the prior high (03/27/2009) by a factor of five. A dramatic increase in unemployment as a result of COVID-19 was widely anticipated. As such, Congress passed, and President Trump signed into law, an almost $2 trillion stimulus bill on Friday. The market reaction to this was a selloff of -3.4%.
Implied volatility actually struck a bit more optimistic tone. The CBOE VIX remained in the 60s throughout the week, which is deeply inverted relative to the realized volatility previously mentioned. In fact, Thursday’s close saw the VIX more than 35 points below realized volatility, which was the second-largest gap in the history of the VIX. 11/04/2008 holds the record for this metric, at -36. The obvious interpretation of this gap is that the options market was convinced realized volatility would decrease from its extreme levels, especially in light of the massive amount of monetary and fiscal market intervention, both in 2008 and now. By 11/04/2008, the S&P 500 had shed about 35% of its peak value through the initial throes of the Great Financial Crisis (GFC). From 11/04/2008 – the point at which implied volatility saw its largest dislocation from realized volatility – to the ultimate GFC nadir, the S&P 500 lost another 31.9%.
While the level of implied volatility remained well below realized volatility, skew rose into the end of the week, with one-month 25-delta put skew hitting a new 2020 peak of 12.3%. Clearly options investors were keen to protect some of the gains seen in the last few days.
We still expect volatility to remain elevated, and the low equity exposure across our Managed Volatility strategies right now reflects this view. While we do not think a sharp rally from here is warranted in any fundamental sense, monetary policy has consistently inflated risk asset prices in the past. As such, we continue to carry upside hedges across strategies to ensure some participation in any near-term rally, rational or otherwise.
Managed Volatility portfolio management team
Craig Stapleton, CFA, FRM
Senior Vice President & Portfolio Manager
Jeremy Gogos, Ph.D., CFA
Vice President & Portfolio Manager
Vice President & Portfolio Manager
The opinions expressed herein represent the current, good faith views of the authors at the time of publication and are provided for limited purposes, are not definitive investment advice, and should not be relied on as such. The information presented in this article has been developed internally and/or obtained from sources believed to be reliable; however, Securian AM does not guarantee the accuracy, adequacy or completeness of such information. Predictions, opinions, and other information contained in this article are subject to change continually and without notice of any kind and may no longer be true after the date indicated. Any forward-looking statements speak only as of the date they are made, and Securian AM assumes no duty to and does not undertake to update forward-looking statements. Forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Actual results could differ materially from those anticipated.
The S&P 500 Index is an unmanaged index of 500 stocks that is generally representative of the performance of larger companies in the U.S. Please note an investor cannot invest directly in an index. Dynamic Managed Volatility Equity Exposure represents total exposure to equites for the Dynamic Managed Volatility representative account. Managed Volatility Equity – Equity Exposure represents total exposure to equites for the Managed Volatility Equity representative account.
All sources are Bloomberg and Securian Asset Management, Inc.
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