As mentioned in the email, we’re in the process of revamping our monthly recaps to avoid unnecessary duplication of information we include in our weekly recaps. If you aren’t receiving those, and would like to,let us know.
Welcome back for our August recap, and we hope you all had a wonderful Labor Day weekend. While that marks the unofficial start of Fall, and football season has kicked off, we’ll have to wait a little longer for pumpkin-spiced lattes and sweater weather, as it seems the summer temps aren’t done with us quite yet.
In any event, we hope you all had a great summer and were able to make new memories with the people who are most important to you; I know I did. After all, isn’t that the whole point?
As I mentioned last month, we will now be sending out our monthly recaps in a more streamlined format that should be shorter and easier to digest. In this recap, we will discuss how the markets performed in August and then get into our topic of the month – options pricing– which impacts pricing/performance of Structured Notes, so let’s get into it.
The Markets in August
In August, equity markets delivered mixed results across major indices, reflecting a blend of economic optimism and sector-specific dynamics, but all finished the month in positive territory.
The Russell 2000 led the charge with a blistering gain of over 7%, in part due to renewed investor confidence after a very strong earnings season, accelerating further following Powell’s comments from Jackson Hole, indicating that the Fed is ready to start cutting rates.
The MSCI EAFE index, which represents developed international stocks outside of the U.S. and Canada, also posted a solid 4.3% return, buoyed by improving economic conditions in Europe and Asia, some of the tariff uncertainty resolved, and further weakening of the US Dollar.
Meanwhile, the Dow rose 3.4%, supported by robust corporate earnings and optimism around infrastructure spending, while the S&P and Nasdaq were up 2% and 1.6%, respectively, with the Nasdaq’s performance possibly dampened by profit-taking in tech stocks after strong year-to-date gains. The worst performer was Emerging Market stock, which was up close to 1.5%, but was impacted by ongoing geopolitical tensions and concerns over slowing growth in key economies.
US Equity Sectors
In August, U.S. sector performance was led by a surprising rebound in Health Care, which rose 5.4%, marking a sharp reversal from its recent underperformance. This was driven by positive earnings surprises and regulatory approvals for key treatments that boosted investor sentiment. Whereas 5 of the July’s 6 worst performing stocks were in Health Care, 4 of the 7 best S&P performers in August came from the sector, including United Healthcare. That said, Health Care stocks still have a lot of ground to make up, as they are still down more than 11% over the past year.
Utility stocks did the inverse in August, going from July’s leader to August’s runt, down 1.6%, with higher operational costs weighing on the sector. Other strong performers included Materials and Consumer Discretionary, which benefited from solid demand and easing supply chain pressures.
Bond Performance
Intermediate bonds, which have struggled for the past year, led the pack in August, as expectations of easing Fed policy boosted the middle of the curve the most. The underperformance in international bonds stemmed from currency-related headwinds, as the index displayed is hedged against the US Dollar, along with less favorable conditions overseas, especially in regions facing economic uncertainty or divergent central bank policies.
Traverse Portfolios
Last month we mentioned that we were planning on introducing updated charts displaying the performance of our models. These charts require a great deal of manual input and customization and aren’t ready yet, however we recently learned that yCharts is planning on releasing a new option in the coming days/weeks, that will allow us to pull in pricing of fixed income products, which will hopefully include our structured notes. That said, we should have these charts updated for next month, as the last thing we want to do is provide you with inaccurate or misleading information.
Topic of the Month – Options Pricing
For our topic of the month, let’s talk about options pricing, as it directly impacts the pricing of structured notes, and will give you a better understanding of why the prices you see on your statements don’t provide a true representation of what those notes would be worth at maturity.
As a quick refresher, options are financial instruments that give purchasers the right—but not the obligation—to buy or sell an asset at a predetermined price, on (or before) a certain date. Therefore, options can be used to strategically manage risk or hedge against market volatility, all while staying aligned with the investor’s long-term goals. On the flipside, sellers of those options are required to sell or buy the underlying asset at that predetermined price, should the buyer exercise that right.
When used thoughtfully, options can complement a diversified portfolio by offering flexibility and protection, helping clients remain confident in their financial plan regardless of market conditions.
Options pricing is a nuanced process that reflects both the current value of the underlying asset and expectations about future market conditions. At its core, an option’s price—known as the premium—is made up of two components: intrinsic value and time value. Intrinsic value represents the immediate profit that could be gained if the option were exercised right now. For a call option, this is calculated as the difference between the market price of the underlying asset and the strike price, if the market price is higher. For a put option, it’s the difference between the strike price and the market price, if the strike price is higher.
The time value of an option reflects the potential for the option to become more profitable before it expires. This value is influenced by factors such as the time remaining until expiration and the expected volatility of the underlying asset. The more time and volatility, the greater the chance the option could move in-the-money, or further into the money, which increases its time value. As expiration approaches, time value diminishes—a phenomenon known as time decay.
To better understand how options respond to market changes, traders use a set of metrics known as the Greeks. These include:
- Delta: Measures how much the option’s price will change for a $1 move in the underlying asset
- Gamma: Tracks how much delta itself changes as the underlying price moves
- Theta: Represents time decay, showing how much value the option loses each day
- Vega: Indicates how sensitive the option is to changes in volatility
- Rho: Measures sensitivity to interest rate changes
I don’t expect you all to become experts in options pricing, but want you to get an idea of everything included in the pricing, especially since the Greeks tend to have a much more significant impact on the pricing on structured notes until they near maturity, and why the price that you see on your statements, or our (traditional) performance charts vs what they would ultimately be worth. This is the reason we’re going to be adding a second chart that isolates the intrinsic value of the notes, as the value of any investment is all but irrelevant unless you are selling, and we have every don’t have any intention of doing that with our structured notes; simply holding them until maturity.
Closing Comments
Well, that’s all for our August recap. We hope you found it informative and thank you for the continued trust you place in us to guide you on your financial journey. Whether you’re soaking up the last days of summer or gearing up for fall, we hope you’re finding time to enjoy what matters most.
See you next month!
Laurence
Disclosures
Investing involves the risk of loss. This content is for informational purposes only and should not be, nor regarded as personalized investment advice or relied upon for investment decisions. Laurence Schiffman and Traverse Planning are affiliates of Clear Creek Financial Management and may maintain positions in the securities discussed in this video. All opinions expressed here are solely those of Traverse Planning and do not reflect the opinions of Clear Creek Financial Management.
This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.
The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of Traverse Planning, and should not be regarded as the views of Clear Creek Financial Management or its respective affiliates or as a description of advisory services provided by Traverse Planning or performance returns of any Traverse Planning Investments client.
References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.