Insights
September 2020 Market Recap
Tuesday, October 6, 2020
The S&P 500® Index returned 8.93%
in the third quarter, bringing its year-to-date return to 5.57%. Over the
quarter, the S&P 500®
Index climbed 5.64% and 7.19% in July and August, respectively, but faced
a significant drawdown in September which led to a decline of 3.80% for the
month. The S&P 500® Index declined 9.52% from September 2
through September 23. The tech-heavy NASDAQ 100 fared worse with a decline of 12.76%
over the same period, as the pullback was driven by losses in many of the technology
companies that lead the market’s advance from April through August. Despite the
September pullback, the S&P 500® Index has climbed 51.75% from
its March 23 low through September 30.
Macroeconomic data showed consistent improvement
from the negative effects of COVID-19 mitigation efforts. The third estimate of
Gross Domestic Product for the second quarter of 2020 showed that the U.S.
economy shrunk at an annualized rate of -31.4%, slightly better than the second
estimate of -31.7% and within consensus range. The unemployment rate reflected
ongoing economic normalization efforts and declined from 10.2% in July to 8.4%
in August, outperforming consensus expectations, while the participation rate
climbed to 61.7%. The August Consumer Price Index, released on September 11,
showed a 1.3% year-over-year increase, above the consensus estimate of 1.2%. With
over 99% of companies reporting, second quarter aggregate operating earnings
were on track to decline 9.63% quarter-over-quarter and 18.93% year-over-year.
More than 84% of the companies that have reported earnings met or exceeded
analyst estimates.
Implied volatility, as measured by the Cboe®
Volatility Index (the VIX®), averaged 25.81 in the third quarter of
2020. Consistent with its normal relationship, average implied volatility exceeded
realized volatility, as measured by the standard deviation of daily returns for
the S&P 500® Index, which was 16.90% for the quarter. Implied
volatility generally trended down over the first half of the third quarter of
2020 before rising in September. The VIX® began the third quarter of
2020 at 28.62 before dipping to an intra-quarter low of 21.35 on August 17. The
VIX® then climbed to its third quarter high of 33.60 on September 3
before closing at 26.37, well above its historical average of 19.42.
The Cboe®
S&P 500 BuyWriteSM Index1 (the BXMSM) returned 6.52% in the third quarter of 2020,
underperforming the S&P 500® Index by 241 basis points
(bps) and bringing its year-to-date return to -9.58%. On the third Friday
of each month, the BXMSM writes a new index call option as the
option it wrote the previous month expires. The premiums the BXMSM collects
on its written index call options have significant influence on its return
potential during market advances and help to mitigate market declines. Premiums
collected as a percentage of the BXM’sSM underlying value were 2.59%,
1.76% and 2.16% in July, August and September, respectively. With monthly
returns of 3.85%, 2.59% and -0.02% for July, August and September, respectively,
strong downside protection from the BXMSM in September did not make
up for significant underperformance in August, resulting in underperformance
for the quarter. Underperformance in August was primarily due to the premiums
collected by the BXMSM in July and August providing insufficient
return potential to keep pace with the S&P 500® Index’s rapid
advance. The equity market's 7.19% return in August put the BXM'sSM September
expiration index call option deep in-the-money, resulting in very low market
exposure when the market peaked on September 2. The written call option thus
provided significant downside protection during the first leg of the equity
market selloff. From the beginning of the month through September 18, the
expiration date of its option, the BXMSM declined 1.10% while the
S&P 500® Index fell 5.08%. The premium collected when the BXMSM
wrote its new index call option with an October expiration provided downside
protection as the equity market continued to decline through September 23 and
allowed for participation in the equity market advance over the last week of
September. From September 18 through
month-end, the BXMSM returned 1.10% while the S&P 500®
Index returned 1.35%.
The Bloomberg Barclays U.S. Aggregate Bond Index
returned 0.62% in the third quarter of 2020, bringing its year-to-date return
to 6.79%. The yield on the 10-year U.S. Treasury Note (the 10-year) started the
quarter at 0.68% and reached an intra-quarter low of 0.51% on August 4 before
climbing to an intra-quarter high of 0.75% on August 27. The yield on the 10-year
then drifted lower to close the quarter at 0.68%.
1The BXMSM is a passive total return
index designed to track the performance of a hypothetical buy-write strategy on
the S&P 500® Index. The construction methodology of the index
includes buying an equity portfolio replicating the holdings of the S&P 500®
Index and selling a single one-month S&P 500® Index call option
with a strike price approximately at-the-money each month on the Friday of the
standard index-option expiration cycle and holding that position until the next
expiration.
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U.S. Market Perspective
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Volatility Pricing Indicates Market Expectations
A Multidimensional Volatility Environment
The Alternative to "There is No Alternative"
A Closer Look at Bond Market Performance
Familiar Factors Present as the VIX® Nears Record
Will Volatility Risk Premium Remain Attractive in
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October 2020 Market Perspective
September 2020 Market Perspective
August 2020 Market Perspective
July 2020 Market Perspective
June 2020 Market Perspective
May 2020 Market Perspective
April 2020 Market Perspective
March 2020 Market Perspective
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December 2019 Market Perspective
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Q3 2019 Market Perspective
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Active PutWrite Market Review – Q1 2021
Index/RA Market Review – Q1 2021
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2020 Active Overwrite Commentary - Q2
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