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Securian AM Market Volatility update June 19, 2020

Recent Market Commentary

Portfolio Positioning

Going forward, we anticipate realized volatility will remain in the high twenties and is likely to move higher. June 11th singlehandedly elevates realized volatility; but because of the looming Q2 2020 rebalance (discussed in further detail below), the waning effects of the first round of fiscal stimulus (CARES Act) on consumer demand, and the potential for economic surprises—good and bad—we expect elevated volatility through the end of Q2 2020.

At these volatility levels, our strategies are generally underweight equity, and volatility’s recent about-face has at least paused the reintroduction of equity risk across our products.

Equity Exposure 5/8/20 6/19/20 High Low Average
Securian AM Dynamic Managed Volatility 24.3% 36.7% 45.4% 24.3% 36.1%
Securian AM Managed Volatility Equity 27.8% 50.5% 66.0% 27.8% 43.8%
Securian AM Managed Volatility S&P 500 36.3% 59.6% 82.0% 36.3% 60.7%
Volatility Metrics 5/8/20 6/19/20 High Low Average
S&P 20 Day Trailing 29.4% 27.2% 29.4% 19.7% 25.1%
CBOE VIX 28.0% 35.1% 40.8% 24.5% 30.1%

Source: Bloomberg, Securian Asset Management, Inc.

Recent Market Commentary

Since our last update, the United States has been rocked by weeks of protests, corporate earning expectations have continued to deteriorate, and economic data—while “less bad” than expectations in some cases—still show just how deep the coronavirus lockdown damage has been.

  • current Q2 2020 S&P 500 earnings estimates are for a -43.5% Year-over-Year contraction
  • the current Quarter-over-Quarter forecast for Q2 2020 US GDP growth is -35%
  • the May jobs report printed a positive 2.5M gain in May but remember that April printed negative 20.7M

Despite these realities, equity markets continued to climb higher through early June, and volatility briefly dipped below 20%. June 11th saw a -5.89% one-day return on the S&P 500, which is an extremely large move (0.1 percentile), and one we interpret as a sign of elevated fragility that necessarily accompanies a financial market on monetary life support. This move pushed realized volatility back to 29%.

In the last month, implied volatility did not lead the charge lower as realized volatility declined. It has been elevated above realized by an average of 4.9% since May 8, indicating that the options market does not anticipate a return to placid equity markets in the near future.

  S&P 500 Return Barclays Aggregate Return Portfolio Start Portfolio End (before rebal)
Q1 2020 -19.6% 3.2% 60/40 54/46
Q2 2020
(to date)
20.4% 2.7% 60/40 64/36
Q2 2020
(to date)
20.4% 2.7% 60/40 64/36

From an asset allocator’s perspective, Q1 and Q2 (to-date) of 2020 is a unique combination. As the above table shows, the dramatic selloff of Q1 pushed a 60% equity, 40% fixed income portfolio all the way to 54/46. In terms of price movement reducing the equity allocation of a portfolio, this is the second-largest equity allocation drop in the S&P 500 total return history, surpassed only by Q4 2008 (52.8/47.2). Our point here is simply that systematic asset allocation programs almost certainly rebalanced back to their target allocations near the end of Q1 2020.

Q2 2020 looks to be whipsawing the asset allocation community, taking portfolios in the opposite direction. The extreme equity rally from March 31st to present has now pushed a 60/40 portfolio all the way to 64/36. The magnitude of this upward move in equity allocation is second only to Q4 1998. The upshot is that we anticipate downward technical pressure in the closing days of Q2 2020 as systematic rebalancing sells equity to once again bring portfolios back to target. 

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.

This material may not be reproduced or distributed without the written permission of Securian Asset Management, Inc.

For Institutional Investment Use Only.

All sources are Bloomberg and Securian Asset Management, Inc.

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