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Securian Financial

Securian AM Market Volatility update May 11, 2020

Recent Market Commentary

Portfolio positioning

Barring extreme moves, one-month realized volatility will close this week (May 15th) around 25%, next week (May 22nd) around 20%, and the following week (May 29th) in the high teens. This range of volatility is something of an inflection point in our strategies, in the sense that they will all be approaching “neutral” equity exposure as volatility drops below 20% (e.g. 60% for Dynamic Managed Vol, 80% for Managed Vol Equity). As previously described, while our strategies have been underweight linear exposure throughout April and May, we have been adding option-based positions that serve as long equity proxies, but with less downside risk than direct equity exposure. For example, both Dynamic Managed Vol and Managed Vol Equity currently carry June expiry VIX puts, sized to approximately 1% notional coverage. In addition, we have been taking advantage of the generally steep skew, and downward-sloping implied vol term structure, by selling short-dated S&P 500 puts to fund longer-dated put purchases.

Equity Exposure 4/9/20 5/8/20 High Low Average
Securian AM Dynamic Managed Volatility 21.2% 24.3% 24.3% 20.8% 22.4%
Securian AM Managed Volatility Equity 19.1% 27.8% 27.8% 18.0% 21.5%
Securian AM Managed Volatility S&P 500 28.8% 36.3% 36.3% 28.4% 32.2%
Volatility Metrics 4/9/20 5/8/20 High Low Average
S&P 20 Day Trailing 85.7% 29.4% 85.7% 29.2% 49.6%
CBOE VIX 41.7% 28.0% 45.4% 28.0% 37.2%

Source: Bloomberg, Securian Asset Management, Inc.

Recent Market Commentary

Since our last update on April 10th, 2020, realized volatility has closed the record implied-realized inversion we highlighted in that update.

VIX Term Structure and Realized

Vix term structure realized

Source: Bloomberg, Securian Asset Management, Inc. Data as of 05.08.2020

As we described, options market pricing dramatically front-ran the prevailing realized volatility environment, with the VIX hitting the low 40s while realized volatility was still in the mid-80s. In the intervening month, realized volatility has followed implied’s precipitous decline, closing this week at 29.4%.

Short-term implied volatility also decreased modestly over this last month, but found its floor in the high 20s. Interestingly, longer-dated volatility—i.e. the 6th VIX future—is actually up over the month. More on that shortly.

There are, at present, numerous environmental and technical factors that should be supportive of elevated volatility. For example, essentially every economic data point that has been released in the last month has been abysmal; the Department of Labor’s Continuing Jobless Claims last printed 22.6M, a number almost 3.5 times higher than the peak value during the Great Financial Crisis. Other employment measures are telling the same story. Unsurprisingly, Q1 2020 GDP came in at -4.8% growth, quarter over quarter. The U.S. is, of course, not alone in suffering significant economic damage from the shelter-in-place measures aimed at slowing the spread of coronavirus. China printed a staggering -9.8% quarter over quarter contraction for Q1 2020, and forecasts for the UK, Germany, Japan, etc. are also calling for contractions.

Sector-sector correlation within the domestic equity market remains quite elevated, finishing the week at almost 88%, which is a 97th percentile value going back to 2002. In addition, one-month put skew remains quite elevated at 6%, suggesting remaining demand for protection against a renewed equity selloff. As-of May 6th, 86% of S&P 500 companies have reported Q1 2020 earnings, and the blended year over year earnings growth is currently at -13.6%.

We hope the reader takes as axiomatic the assertion that these economic and technical factors would ordinarily imply elevated equity volatility. Thanks to the enormous monetary and fiscal actions from the Federal Reserve and Congress, the equity market has completely disconnected from reality, rallying an absurd 31% from the March 23rd low through May 8th. Again, this bounce is occurring concurrent with some of the worst economic and earnings numbers ever seen. In addition, there is still no viable solution to the coronavirus conundrum beyond shelter-in-place, the ultimate cause of the economic damage the globe is currently coping with. We interpret the longer-dated VIX futures increasing over the month as demonstration that we are not the only asset managers with the view that equity valuations have to catch down to the economy, and not that the economy will quickly rebound and justify current equity valuations.

Managed Volatility portfolio management team

Craig Stapleton, bio photo

Craig Stapleton, CFA, FRM

Senior Vice President & Portfolio Manager

Jeremy Gogos, bio photo

Jeremy Gogos, Ph.D., CFA

Vice President & Portfolio Manager

Merlin Erickson, bio photo

Merlin Erickson

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 refers to the Securian AM Dynamic Managed Volatility strategy. Managed Volatility Equity refers to the Securian AM Managed Volatility Equity strategy.

Securian Asset Management, Inc. is a subsidiary of Securian Financial Group, Inc.

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DOFU 5-2020