Did the Optimists Triumph?

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The last 6 months have been super interesting. I feel like there was peak exuberance post-US elections and I can't tell you how many investors just said to me, Trump is going to manage the stock market. He views the stock market as a gauge of his success. And the last few weeks, days, what have you, have been a little bit of a reckoning for them.

Hello and welcome to the Barron's Streetwise podcast. Clearly, I am not Jack Howe. Alexis here, Streetwise producer. Jack is taking a well-deserved break this week, so we're giving you a replay of one of our favorite episodes from earlier this year. The voice you heard up top was Amy Wu Silverman. She's the head of derivative strategy at RBC Capital Markets, and she's going to tell us what to consider if you're thinking about hedging the US stock market. Don't worry, we'll hear from Jack, who shares research on over a century of global investment returns and breaks down what it all means for investing in the S&P 500. All that is up next.

Listening in is our audio producer Alexis Moore. Hi Alexis.

Hey Jack.

With us also Jackson Cantrell. Jackson, you are leaving us soon. You're here for another week and you're leaving for— I guess we'll get into it next episode, right? You're doing a startup. It's industrial composting. You're leaving me for rotting banana peels. Have I got that right? That's an ungenerous way to say it, but yeah, it's my penultimate week.

We're going to miss you. Big shoes to feel. To feel.

I'm not sure they're that big. I'm a size 11, Jack. I don't know. It's already gold.

I appreciate this because I feel like every time I make a mistake, Jack, you just laugh and compliment me. So I think I could do this more often.

Um, do I need to apologize in advance for my voice, for whatever is going on here with this frogginess? Can people put up with 10 minutes of this before we get through our conversation with Amy? I'm not sure. I wasn't up late yelling at anyone or anything. It's just, uh, yeah, I don't know. I've got some chicken soup here. Let's, let's see what happens. So I started this week with a question in the back of my mind: is your S&P 500 fund still enough? Is it still the thing you need to do the job? Because it has done remarkably well. You've more than tripled your money in that thing over the past decade. It's also turned you into a stock market genius. If you hold an S&P 500 fund, you, you were bullish on Nvidia back in 2001. Not like those babbling fools who said it was just a video game company. You knew that it was a future artificial intelligence world beater. Or at least your S&P 500 fund did, and it increased your weighting to Nvidia over time. And that's just one of the reasons that you've done so well. Congratulations on your genius. And this year so far, you can't really call it a crisis of confidence in the S&P 500. I call it a hiccup amid hallelujahs. It's down, last I saw, a fraction of a percent year to date. Okay, no big whoop. But if you really know where to look for stock market anxieties, you can find some. There's something called the Equal Weight S&P 500 Index. It's not loaded up with big tech behemoths. It just gives each company an equal weighting. And that's doing better than the regular index so far this year. Is that a change in leadership? Defensive sectors have been rallying. Healthcare was one of the worst performers last year. It's this year's best performer so far. B of A Securities calculates that February ranked among the top 5% of months going back to 1979 for the relative performance of value stocks. They beat growth stocks by 3.9 percentage points. There've been so many calls over the years for a rotation to value. Is this another head fake or is this the real thing? Meanwhile, shares in Europe and China are outperforming the U.S. this year. So I think that has to be leaving a lot of index investors torn over whether they should fiddle with their fund mixes. And the answer to that is a tough one. Theoretically, yes, there's other stuff out there that is cheaper than the S&P 500 index at 21 times this year's projected earnings. But real-world experience says no. We keep doubting the cap-weighted US stock market and it keeps beating the world. I'm not sure where that leaves us, but 3 UK professors this week released a report. It doesn't really address this topic directly, but it does offer clues to how investors should think about long-term returns. The professors are Paul Marsh and Mike Staunton at London Business School and Elroy Dimson at Cambridge. If those names sound familiar, it's because around the turn of the millennium, they wrote a book called Triumph of the Optimists. 101 Years of Global Investment Returns. In it, they lovingly compiled evidence on the exploits of stocks and bonds and bills and currencies and consumer prices across countries and time periods. Not just the chipper stuff that Wall Street puts in the glossy brochures. What about the countries where there were government expropriations of private assets? How did those affect investor returns for people who were broadly diversified? Well, these professors have freshened up their numbers in yearly reports since that book, and they're just out with their latest installment. It's sponsored by the Swiss bank UBS, and it has 125 years of data. I have read the report, and no, dear listener, much as I like you, I'm under strict orders from UBS to not share copies, but I will share a handful of observations. Number one is that America has gone from exceptional to exceptional-er. Back in 2000, the original time of the book, the U.S. had been the best-performing stock market of the prior century. Back in 1900, it was 14% of the world's stock market, and by 2000, it was up to 49%. And maybe that's unsurprising because the U.S. was the world's dominant economy in the 20th century. It was relatively insulated from the destruction seen in Europe and Japan by world wars. What's maybe more surprising is that since then, the US has become more dominant, not less. There was a better part of a decade after 2000 where US stock returns were weak and there was a lot of hot money flowing into emerging markets. The BRICS, remember Brazil, Russia, India, China. But that trend didn't last. And by 2021, the US had climbed even higher to 56% of the world's stock market value. And in that year's report, the professors cautioned investors should not expect more US outperformance. Runs like this don't last forever, but this one has kept going. And by now, by the end of 2024, the US was 64% of the world stock market. If you're looking at just developed markets, the US is 73%. It makes you wonder how long this can last. Dominant markets do not have to lose their place, lose their dominance in order to slip into underperformance. All that really has to happen is for the good news to be fully reflected in the share prices. But there are, of course, cases throughout history of dominant investment markets losing that position. I mentioned that back in 1900, the US was 14% of the world market. That was the second position. The leader back then was the United Kingdom, or Great Britain, or whatever you're supposed to have called it back then. Don't Jeopardy me on this. It was 24% of the world stock market, and now it's down to 3%. And that's not even the most extreme example. And this brings me to observation number 2. Jackson, you know how I feel about the 1986, uh, movie Gung Ho starring Michael Keaton. We've talked about this before. We've talked about probably dozens of 1980s movies, but not that one. I think we have— people will say it's a business comedy. I regard it as an investment horror prequel. And what I'm talking about is this, the plot. Alexis, have you seen Gung Ho?

No, unfortunately I was not alive.

I'm not quite sure how comfy with that. This is going to happen a lot. My, my Alexa is going to be talking to me a lot when I'm talking to you. You've got a lot of movie viewing to do. I'm gonna have to send you my Blockbuster Video card and just a whole list of things you need to catch up on. Okay, so Gung Ho, there's a Tokyo automaker that attempts some efficiency improvements at a Pennsylvania plant, and hilarity ensues. Or maybe it doesn't, because the thing only got 33% positive on rottentomatoes.com. But the plot says something about where America was in its anxiety at that time. I was in high school back then. The country was in a panic over American school kids being passed by Japanese school kids. Japan seemed to be beating us in everything. And when you look at the stock market, it's easy to see where those feelings came from. Japan passed the United States as a share of the world stock market. It actually peaked at 40% in 1989. And at the time Japan peaked at 40%, the US was 29%. So it looked a lot like the US had ceded its dominance to Japan. And of course, it turns out that it was just a massive asset bubble. Today, Japan is below 6%. So that's a stark example of how a country can go from the lead to far from the lead in terms of stock market weighting in the world. I don't think that's what the US is headed for. Maybe it's even time to put money in Japan, which brings me to the subject of international diversification. And that's really observation number 3. It has worked well everywhere in the world except for America. Really? I know we always talk about it like it's a good thing, and I think it is a good thing. There was this paper back in 1974 on the subject that argued that US investors could reduce their risk by half by diversifying and buying overseas assets. Before then, most ordinary investors just talked about diversifying by buying different US assets. This is really the start of an international investing movement in the US, and there were funds that came along for that purpose, and money trickled and then flowed and then flooded. And if you look back over the half century since then, you find that American investors would have been better off staying at home, better for risk-adjusted returns. For really both reasons, the returns were much better in the US, but also the volatility was higher in non-US markets. That's why it's always a little bit awkward when we talk about the importance of diversifying overseas. There's definitely sound theoretical support for it, but for American investors, it hasn't really turned up yet in real-world results. Paul Marsh, one of the yearbook co-authors, writes, even for a US investor, it makes sense to diversify internationally, but it's not guaranteed. Why would they conclude that it makes sense if it's never played out? I think because it's a good question. I think, I mean, I don't want to put words in the man's mouth, but I think the longer, the further away you get from it working, the cheaper overseas markets become relative to the US? And isn't there financial gravity that keeps that from happening forever? Or maybe not. Maybe they're cheap for a reason. Maybe we just have better companies here in the US that are gonna endlessly outperform. I don't think of things as moving away from the mean endlessly. I think of things reverting to the mean eventually, but it's happened for so long that it's really difficult to say what the rules actually are. I think for investors on the fence, you're not gonna do a lot of harm by diversifying overseas for reasons that I'll come to in a few minutes. Yeah, because we can't expect that, or maybe we can expect that at one day the US is 99% of the global market. I'm not betting on a rise from 64% now to 99% by let's say yearbook 2075. As Wall Street says, that's not my base case. But I don't know, maybe we can't rule it out. Okay. Next observation number 4: Bonds stink, but you probably need them. Since 1990, the average real return— when I say real return, I mean after inflation, after subtracting for inflation— the average real return on government bonds since 1900 has been 0.9% per year, less than a percent. But you say that's okay, at least they're safe. Well, they're sort of safe. In the US, returns for stocks have definitely been more volatile than those for bonds since 1990, and the worst drawdowns for stocks have exceeded those for bonds. During the Great Depression, stocks lost 79% at one point. That's from the 1929 peak to the 1932 low, if you adjust for inflation. And the full recovery period, if you go from peak to the next peak, That was more than 15 years. Awful. And bonds have not experienced a crash that sharp, but they've been close, adjusted for inflation. And the key is they've been down for far longer. If you start in December 1940 at the peak, then for bonds, they lost 67% in real terms over more than 40 years. It took them 50 years to make a new peak. So when you say that bonds are safe, it depends on what you mean. But correlations between bonds and stocks are low, so you should buy some bonds. They're probably going to stink long term, but hopefully not as much as stocks in the short term when stocks are having a rough ride. Observation number 5— I think I lost count— stocks are great, just not most of them. What do I mean? U.S. stocks since 1900 have returned 9.7% a year annualized. If you subtract for inflation, that's 6.6%. It's enough to have turned a dollar invested into $2,911 of buying power. And other markets did well too. Suppose that in 1900— Jackson, my 1900 music please. Do you have Maple Leaf Rag by Scott Joplin? I read today that that was copyrighted— copywritten, copyrighted in 1899. So it's right around then. Is it long enough ago that we can use it without paying someone? And do you have it, Alexis? Can you take this one?

Yes.

Okay, so if in 1900 you had bought stocks everywhere but America, you, you didn't want America in your portfolio. You might have been upset about McKinley chasing the Spanish out of Cuba, or you might have been excited about the rest of the world— Germany and Bayer patenting aspirin. Do not make me drop more 1899 references that I Googled. I will, so help me. So you invest everywhere but the U.S. You have since then, over the past century and a quarter— by the way, you look great for 160 years old— you have since then made a real 4.3% annualized, and that's enough to have turned a dollar into $194. I know it's no $2,911, but it's not bad for an epic misstep. In fact, stocks have been the best-performing asset class for all 21 countries for which the professors have 125-year continuous investment histories. Now look, in investing, there is actually a dire shortage of things that we truly know. I know that sounds weird because every week in this podcast we talk about things we think we know, or we think we think, but we don't know as much as you might think. That's why the field of investing, you might have noticed at times, seems full of blowholes and charlatans. It's because it's difficult to prove anything right or wrong. But this is something that I'm calling a thing that we know, and that is that stocks do better than the other stuff given enough time. And it's not just because they have done that everywhere for which we have the historical record. It's because stocks, as I've said before, represent businesses and bonds represent financing and commodities and inflation. They represent stuff. And businesses wouldn't exist if they couldn't consistently turn financing and stuff into something more valuable. Jackson, you have a question? I think you said blowhole there instead of blowhard, but other than that, I get your point. I meant blowholes. It's a nautical reference. All right. Okay. Now, all that said, most individual stocks, believe it or not, are not great or even good. The professors point to a 2018 study that showed that 57% of US stocks had lifetime returns that were worse than treasury bills. They also say that the net gain for the US stock market over the past century, it's more or less explained by 4% of stocks. And this is the real reason that holding a big basket of stocks makes a lot of sense. It's not because you want to dilute the damage from your losers. Most of them will be losers. It's because you have to cast the net pretty wide to find winners. By the way, congratulations again on spotting Nvidia so early. Okay, last observation, whatever number I'm up to. The US stock market looks concentrated unless you compare it. Okay, there's 3 companies that recently made up 19% of the value of the US stock market, and concentration in the market is the highest it's been in 92 years, which makes you think that something has to give. Maybe it does, but the market was more concentrated back in 1900. It was 63% railroads. Somehow stocks have done well since then, even though railroads are now less than 1%. Also, take a look at the concentration in other countries. In France, 3 stocks are 23% of the market. In Germany, 36%. In Korea, 40%. In Taiwan, 59%. In fact, among the world's dozen largest markets, The US is the third least concentrated. What's the least and what's the most? Least, Japan, followed by India. Most, Taiwan. All of this leads me to my grand conclusion, which is, Jackson? Stocks do the best over time and you should buy the whole market. Okay. Alexis?

You asked the question, is the S&P 500 enough? And it is.

I think I like Alexis's more. I'm thinking I don't actually, I don't actually have one, but that sounds pretty good to me. I think that it, you know, you can do people who are telling you buy a sliver of the equal weight S&P 500 just to diversify, or, uh, you know, make sure you have some of your money overseas. I think you'll be fine doing that. I don't think you're going to get hurt doing that. I'm not sure it's such an imperative, and I don't think that there's a reason to panic about your S&P 500 fund just because it has done so well for so long. By the way, I do have what the professors think returns will be going forward. I mean, I probably should have led with that. That's what, that's what people really want to know. Stock returns, I should point out, have been a little bit lower for the first 25 years of this century than they were for the prior century in the US. And that makes sense. We've had 3 big busts, right? The dot-com bubble popping in 2000, and then there was the global financial crisis, and then there was COVID. Okay, so the professors have this chart here about expected returns for different generations of Americans. They have this for stocks and bonds and for a 60/40 blend of stocks and bonds. Obviously, what you're going to make in stocks going forward is highly theoretical. It's based in part on current valuations. Bonds, you can at least use the current yield as a starting point. It's definitely higher than it was a few years ago. Anyhow, for baby boomers, they have returns since 1950 averaging 5.7% real on a 60/40 portfolio of stocks and bonds. For Generation X, that's my generation, about a half point lower than that, 5.2% a year since 1970. For millennials, Jackson, that's you. What did you say you were? I'm the last millennial. The last millennial. Well, inform the others, please. 4.9% is what you could expect as a blended return, including since 1990 and going forward. Okay, not— you're not going to do as well as us and as the baby boomers. No one beats the baby boomers as it General guiding principle. And Generation Z, is that you, Alexis?

That is me. Uh, if Jackson is the last millennial, I am the first Gen Z.

The first Gen Zer. Um, I get some— well, I don't want to know. I've got some, some news here from the professors. Now, it's not so bad. Um, 3.9%. That's what they say annually, 3.9% a year on your 60/40 portfolio. That's a full percentage point less than Jackson, and I'm sorry about that. Can you put in it for a transfer to a different generation? Because I feel like—

Yeah, I feel like if you could trade with me, Jack, I would love to be Gen X. If you could accept me into Gen X, I would be good.

But you don't want to be old like me. I mean, listen to my broken down voice. You don't want this. You don't want this life. So I think that's the takeaway. There's no reason that your S&P 500 can't continue to be relevant and a good performer for you and a core holding. But I think there is reason to expect somewhat lower returns going forward than we've seen in the past. You said this is for 60/40 portfolios. Do they include other mixes? They don't include other mixes. That's the only mix. So if you're— now you're still, uh, 70% Bitcoin, 30% GameStop. Do I have that right? Yeah, that's what I was talking about. No, they don't have that one. Sorry, buddy. Dang. Okay, so that's a good place for us to take a break. When I come back, we'll have my conversation with Amy Wu Silverman about hedging the stock market. Data is everywhere, but is it ready for consumption? Morningstar developed the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks. Welcome back. Alexis, uh, hit me with that term again. What is— what is Yeah.

Reheating nachos.

I'm familiar with most of the lingo, but I haven't heard that one. Reheating nachos. What does it mean?

Okay. Okay. Reheating nachos is essentially if I do what you're doing, if I, if I copy you, right? So if I steal your look, Jack, then I am reheating nachos.

Well, that's going to be a tough one to pull off. I've been told that it's kind of a Hank from King of the Hill type of thing going on. Not just the jeans and the white t-shirt, but also the glasses and the just sort of general body shape. It's a lot. There's a lot to the look.

All right. I'm going to work on the glasses.

Maybe I'm reheating Hank's nachos now that I'm thinking about it. All right. Well, this brings us cheesily enough to the subject of derivatives, things that are derivative. I had an opportunity recently to speak with Amy Wu Silverman. She's the head of derivatives strategy at RBC Capital Markets. And in investing, derivatives— people who aren't that familiar say, aren't those the things that blow up? Aren't those the things that are super risky? Well, yeah, but also no. Derivatives are just things that derive their value from something else. So in the example of stocks, you have options. Options are bets on the direction of stocks and they derive their value from stocks. There are super risky things that you can do with options and also super conservative ones. So it kind of depends on how you use them. But one of the ways people use options is to hedge against an expected decline in the stock market. And I think that topic is on people's minds a little bit now, not because returns are so bad, but just because we've had a couple of wobbles here early in the year and because we've done so well for so long. Anyhow, I asked Amy about that and some more stuff. Let's listen to part of that conversation now.

Yeah. So first, you know, look, what I cover is the equity derivatives space. So the investors we speak to are hedge funds or asset managers, pension funds who are all looking at the portfolio and, you know, potentially thinking about hedging and managing their risk. And what I would say is the last 6 months have been super interesting. I feel like there is peak exuberance post-U.S. elections and I can't tell you how many investors just said to me, Trump is going to manage the stock market. He views the stock market as a gauge of his success. And, you know, this Trump put is going to be something that's kind of under the market, so to speak. And the last few weeks, days, what have you, have been a little bit of a reckoning for them in terms of really coming to terms with, wow, these tariffs might actually get implemented. Wow, the geopolitical situation looks completely different. And the way we see that in our markets is a rise in hedging demand. So you can see that on the index level and S&P, you can see that on individual sectors. And you know that this paddling duck analogy we've been using just to describe the suppressed volatility environment, it certainly feels like the duck might paddle off a waterfall right now.

How does that manifest itself, that rising demand? You just see higher, like buying or selling more contracts of a particular variety. What do you see?

Yeah. So the technical definition, we call it skew. So it's just this idea that you can kind of see, you know, in any given underlier. So let's take the S&P. There is going to be the implied volatility of the put option. So essentially what puts cost on the S&P versus what calls cost on the S&P. You can track that over time. You know, you can track that over the past 50 years. And essentially when that put demand really starts to outweigh that call demand by a lot, That's, that's a rise in negative sentiment. That's essentially investors saying, hey, I've got my portfolio, but I'm kind of getting a little wary. You know, maybe I want to get a little downside protection next 1 month, 2 months, 3 months, what have you. So that skew is that differential in the prices of those options. And when that starts to rise, that really signals that the sentiment might be shifting.

So the puts are the bets that the market is going to go down. A lot of people placing bets that the market's going to fall. And I guess that's to protect themselves. In the event that it does fall, they'll lose some money on their stocks, but they'll make some money on these bets that they've placed. Is that strategy in general— you're the derivative strategy person. What if I came to you and said, I want to live in a world where I invest in stocks and I participate in the long-term returns of stocks, but I don't like to take a lot of risk. So I want to just protect myself on the downside by buying puts or whatever you tell me is the best option strategy. Is it possible to live in that world or is it just too costly to do that on an ongoing basis?

Yeah, it's such a great question. If it were that simple, you know, then, then I think my job would be too easy. Unfortunately, I'll give you one of my favorite statistics. So in 2022, the market drew down 20%. You would think this is kind of the perfect environment to hold some puts in your portfolio to protect. If you had done a systematic put buying strategy, so you can actually look at it, it's called the PPUT index. You actually managed to draw down 21%. So that's pretty brutal, right? We call that a fail in terms of the market drawing down, but also your systematic protection breaking down, too. And the reason for that, you know, is a little complicated, but basically comes down to the idea that when you traffic in what we traffic in, which is options, it's not just about putting on your hedge, it's about the timing of your hedge. And then it's also about kind of the path dependency of the market. So if the market falls in like too orderly of a fashion, then you actually don't, you don't get that juice that you typically would expect from volatility going higher. And likewise, you know, when you get these like huge gap downs, so like the great financial crisis, for example, or Volmageddon in February 2018 or August 5th of last year, those actually tend to really work out well for options. But you had to have gotten the timing right. So to answer your question, you know, it's a little bit trickier. There's a lot of metrics that go into it, but essentially Yeah, in a perfect world, that would be great, but your hedges don't always pan out the way you expect them to.

That's fascinating. I always tell people, you know, with options, you not only have to be right, you have to be right soon, you know, because of the eroding time value. But what you're saying is you also have to be right in the right way, because, you know, you could bet on the market declining, but it has to be a sharp and severe decline. If it's too orderly, your bets might not pay off. So What do you tell people who are looking for that protection? Is it something where it's just too difficult or too expensive to do on an ongoing basis? Is it something where people just pick their moments? They say, look, I need to be safe for the next, you know, couple of months, or people have specific needs. What do people use that sort of broad stock market protection for?

Yeah, well, look, I don't want to, you know, hurl every negative comment at hedging because it does work and it can work. And one part of our thesis right now that's slightly different is in the past few years we've had this paddling duck environment, just to go back to that analogy. And the idea is simply that the market kind of looks calm and smooth on the surface, just like this duck, but underneath you have those, you know, violently paddling little duck feet. And that's kind of the violent rotations you see. There might be zigs and there might be zags that tends to cancel out on an index level. But what's actually happening now in the market is the moves are getting a little bit more correlated. So it's starting to matter less what specific companies do, the idiosyncratic risks, but it's starting to matter more on macro side. So, for instance, if President Trump just says something about tariffs, you know, that that can impact a whole slew of companies all at once. And that correlation is a function that feeds into portfolio volatility. So if you actually go back to your, you know, your corporate finance 101 books and you actually look at the definition for portfolio volatility, there is a component there that is just simply correlation. If correlations start to rise from where they are right now, implied correlations about the mid-20s into the 80s, you can bet the volatility will rise too. So essentially what I'm saying is we're heading into an environment where I think hedges are going to work a lot better than they have in these past environments. And it is something where since we do have specific dates on the, on the horizon, so, you know, whether that be a potential Fed meeting or data points like payrolls or CPI, you know, you can use catalysts, but as well as the idea that potentially correlations could pick up, which might actually make hedging more attractive right now.

Interesting. A few minutes ago you talked about a rise in the demand for puts versus calls. In your research over the years, is there anything to suggest— like, what does it tell us when people are doing that? It tells us that people are worried, but is there any evidence out there that those people end up being right or end up not being right? Or is there any kind of trend? In other words, should we be alarmed when all these other people are alarmed?

So it's super interesting. It's actually the opposite signal that we have found to be kind of a leading indicator. So, for example, in normal markets, people are typically long equities and they tend to hedge, you know, just the same way you would think about you own a house and you buy fire insurance on the house, right? You probably don't expect a fire in your house, but you're going to pay like that little bit of premium just to keep yourself calm, you know, at night. Right. So, so that's a normal market. We've seen something in the past few years which we call skew inversion, but it's essentially the idea that the call implied volatility, the call prices have gotten so bid up relative to the puts. It's actually an early signal for momentum and FOMO. And I'll give you kind of the best example of this is I don't know if you remember all the way back to 2023 in May when Nvidia had its first kind of blowout earnings. You know, arguably this started the whole AI frenzy, we started to see skew inversion in that stock. So meaning the call option prices started to dramatically outweigh the put option prices. I'll take you back even further in time. You go back to COVID when we had the meme craze with GameStop and AMC. You saw the same thing happening, this idea of skew inversion. So the call option prices dramatically outweighing the put option prices. That has been an early signal of momentum.. And we have found that when the momentum factor takes over, it actually keeps going and going for a while. And so it's not necessarily that the skew rising in the bearish way that has been a signal. It's the opposite that has in the past few years really been a signal that the market might continue higher.

So the fact that people are betting on puts, it doesn't necessarily— it's not some kind of early warning signal that the market's going to decline, but it's less of that momentum-chasing activity that you'd expect going forward.

Yeah. And just to be clear, we've completely seen that sucked out of the market right now.

So hard to find some momentum to chase right now.

Yeah. Momentum factors done really, really poorly this year. I would say if you're looking for a downside indicator, it's implied correlation starting to rise. So again, it's in— it's about mid-20s right now. If it starts to climb higher, that, that to me would be very worrying because that's this idea that we're no longer trading on fundamentals. We're starting to trade essentially on fear and panic.

I want to ask you one other question about options while I have you. It's a different thing than we've been talking about now, and it has to do with people who own stocks and they write calls against their stocks to try to pick up extra income. Sometimes people ask me, is that a good idea? And I'm firmly in the camp of, I don't really know. I mean, I understand the appeal of it, uh, and I understand the, you know, where it could cost you. I know that there are funds out there that that do it. Do you have an opinion on whether that's a good deal for investors, just very broadly speaking, to own a portfolio of blue-chip stocks and kind of write calls as you go along? Is it good, bad, or neutral for an investor to do that?

Look, I think it can make a lot of sense. I think this comes back down to what are your goals and what is your framework for thinking about return on the market. So, so for example, you know, when I have this conversation about overwriting with investors on the institutional side, the reason they consider it is because they believe the upside in the market is limited. So it's a strategy where, you know, if you think from a valuation perspective or from an upside to price target perspective, we don't have that much more room to go, then essentially getting that implied volatility versus realized volatility premium is a way to harvest extra income for, for people who, you know, like, let's say for instance, you really believe in the AI trade in specific names and you're not willing to give up that upside, that may not make sense for you. But I absolutely think there is a place for it. There are a lot of— the growth in notional of these kind of volatility risk premium harvesting funds have just exploded, and there is a reason for that, particularly as we get to kind of these valuation levels that I think make people, you know, take a second look. And so that, that is something that I think can make sense in just the context of what portfolio framework you're looking at.

If you believe that the stock market is at a peak, at a near-term peak, but you're too chicken to sell your stocks because you've been wrong before, you can write those covered calls and just, you know, if you're right, you pick up some extra income, and if you're wrong, I guess you cap some of your upside. But it might, it might make sense for that type of investor that's trying to make us, you know, a bet but not a very bold bet that we're near a top right now.

Yes. And I'll tell you what some people do is they'll write that call and they'll actually use it to help fund the downside, the hedges. So, you know, as I had mentioned earlier, part of the difficulty with hedges is the timing. So, you know, you don't want to constantly be burning premium trying to carry these hedges. So what people do to alleviate a little bit of that is they'll overwrite on their portfolio and they'll use it either to collar their strategy by owning a put option or a put spread option. And those are strategies that are essentially kind of trying to tackle both the downside as well as the upside in that framework.

What have I neglected to ask you about that's on your mind or the, that you think that investors are not seeing right now that they should be paying more attention to? Anything come to mind?

You know, I'll, I'll give you one thing to think about, which is a little esoteric, but, but it's really been a structural change in our market, which is when I started in this industry over 20 years ago, the kind of average life of a hedge was maybe 1 to 3 months. But now there is the advent of zero-day-to-expiry trading. So meaning there are options that expire within the day, and if you look at feeble volumes, that accounts for more than half of all SPX options traded. So structurally, we've had massive duration shrinkage in the options market. And what that means is when I think about options as kind of a GPS device that says to me, you know, hey, in 1,000 feet I should be making this left turn, it's kind of like only giving you about 10 feet to make that left turn now. And my point is just to continue the driving analogy, there's going to be some potholes ahead and it's likely we won't be getting as much of a signal for those potholes as we did in the past.

Thank you, Amy. And I also want to thank UBS for the report I mentioned earlier. I want to thank Hank from King of the Hill for the look. And thank all of you for listening. You can subscribe to the podcast on Apple Podcasts, Spotify, wherever you listen. If you listen on Apple, you can write a review. If you have a question that you'd like to hear answered on the podcast, you can tape yourself on your voice memo app on your phone. You can email it into jack.how. That's hough@barons.com. Have a great week. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.