We 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.
| Equity exposure | 1/1/20 | 4/3/20 | High | Low | Average |
|---|---|---|---|---|---|
| Securian AM Dynamic Managed Volatility | 80.3% | 19.8% | 80.8% | 19.0% | 54.9% |
| Securian AM Managed Volatility Equity | 99.0% | 18.9% | 99.6% | 13.6% | 70.2% |
| Securian AM Managed Volatility S&P 500 | 141.0% | 28.8% | 141.6% | 26.9% | 93.8% |
| Volatility metrics | 1/1/20 | 4/3/20 | High | Low | Average |
|---|---|---|---|---|---|
| S&P 20 Day Trailing | 6.5% | 95.5% | 97.1% | 6.5% | 56.5% |
| CBOE VIX | 12.5% | 46.8% | 82.7% | 12.1% | 32.2% |
Source: Bloomberg, Securian Asset Management, Inc.
The options market has continued to express some relative optimism about the near-term trajectory of the equity market. The VIX decreased from 65.5 to 46.8, and one month, 25-delta put skew also decreased 3.9%.
We are less optimistic than this. The recent economic data releases that include the preliminary impacts of the coronavirus pandemic have been abysmal. For instance, the enormous initial jobless claims number the Department of Labor released on March 20th (3.307 million). The subsequent weekly release on March 27th was more than double that, at 6.648 million. There simply are no modern parallels for the economic impact of an essentially nationwide “shelter-in-place” order. For example, a recent article in the Wall Street Journal estimated that 25% of the US economy has been taken offline. We are hard-pressed to believe the S&P 500 low turned in on March 23rd (2237.40, or -3.8% off the prior high) will be the ultimate nadir of this 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,
The domestic equity market set two new, diametrically-opposed records the week of March 30th:
An inversion of implied volatility, relative to realized, is the options market expressing the expectation that implied volatility will decrease from its current level. For example, the largest inversion outside of this current volatility flare (-36.6%) was on November 11th 2008. At that point, realized 1M volatility was 84.3%. By December 31st 2008, realized 1M volatility had decreased to 38.2%.
The evolution of recent one-week volatility would suggest the market is on a similar volatility trajectory:
While we think it is likely that realized volatility will come down from the current historic levels, we do not anticipate volatility returning to anything close to average in the near term.
Senior Vice President & Portfolio Manager
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.
Sources:
Bloomberg and Securian Asset Management, Inc.
Wall Street Journal; “State Shutdowns Have Taken at Least a Quarter of U.S. Economy Offline”
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