Barron's Streetwise — "Is the S&P 500 Enough?"

Date: March 7, 2025
Host: Jack Hough
Guests: Amy Wu Silverman (Head of Derivatives Strategy, RBC Capital Markets), Jomana Selehin (Head of Investment Strategy Group Europe, Vanguard)

Episode Overview

This episode investigates whether the S&P 500 continues to be the "enough" investment vehicle for most portfolios, considering recent market dynamics, global trends, and outcomes from new research on long-term investment returns. Host Jack Hough draws on landmark data covering 125 years of global markets, explores the 60:40 portfolio’s staying power, and talks with expert guests about hedging strategies and the importance—or limits—of diversification.

Key Topics & Insights

1. S&P 500: Still Enough?

(Main segment, 02:17–23:43)

• S&P 500 Outperformance:

  • Over the past decade, those invested in the S&P 500 have significantly outperformed global peers.
  • The market's sustained dominance is mainly attributed to the US’ economic resilience and mega-cap tech companies.
  • "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…" (03:01)

• Current Leadership Shifts:

  • Equal-weight S&P 500 is outperforming cap-weighted this year, possibly hinting at a broader market rotation from big tech to other sectors.
  • Sectors like health care—poor performers last year—are currently leading (03:56).
  • Value stocks outperformed growth stocks in February, per BofA Securities (04:13).
  • Outperformance in European and Chinese stocks year-to-date is making investors reconsider allocation mixes (05:08).

• Valuations & Real-World Dilemmas:

  • US stocks are relatively expensive at 21x projected earnings.
  • Despite persistent calls to diversify or rotate, "We keep doubting the cap weighted US stock market and it keeps beating the world." (05:36)

2. Global Market Research: Lessons from 125 Years

(05:36–19:49)

• US Exceptionalism, Then and Now:

  • At the start of the 20th century, the US was 14% of the global market, rising to 64% by the end of 2024.
    • “Back in 1900 it was 14% of the world's stock market. And by 2000 it was up to 49%. ...by now, by the end of 2024, the US was 64% of the world stock market.” (06:34)
  • Past dominant markets (like the UK and Japan) eventually ceded leadership due to various crises and asset bubbles. For instance, Japan peaked at 40% in 1989 but shrank to under 6% today.

• International Diversification – Theory vs. Practice:

  • It's historically paid off everywhere except in the US, largely because US returns were both higher and less volatile (11:44).
  • Jack Hough: "There's definitely sound theoretical support for it, but for American investors it hasn't really turned up yet in real world results." (12:00)

• Decline of Market Leaders:

  • Example: UK was global leader in 1900 with 24%; now just 3%. Japan overtook the US at one point due to asset bubbles.

• Why Diversify?

  • Although US investors haven't been rewarded for international diversification, the experts maintain it's reasonable because “the further away you get from it working, the cheaper overseas markets become relative to the US.” (12:12)

• Concentration Risk:

  • US market is now highly concentrated in a handful of stocks—three companies make up 19% of its value—though this is less extreme than concentrations seen historically in other markets.
  • “Among the world's dozen largest markets, the US is the third least concentrated.” (19:31)

3. The 60:40 Portfolio – Still Relevant?

(Opening, 41:40–41:56 & Throughout)

• Jomana Selehin's (Vanguard) View:

  • The 60:40 model (stocks/bonds) is still a useful concept but shouldn't be taken literally for all investors; personalization and flexibility are key.
  • Selehin: “What we're talking about today is thinking about personalization. Thinking about where is the next frontier on balanced investing... you can take advantage of your situation and the market situation.” (41:56)

• Role of Bonds:

  • Long-term government bonds have delivered very modest real returns (<1%/yr since 1900), sometimes experiencing decades-long drawdowns (13:09).
  • Despite that, bonds remain important for diversification because their correlation with stocks is low.

• Future Return Expectations:

  • 60:40 returns have declined for each generation:
    • Boomers: 5.7% real since 1950
    • Gen X: 5.2% since 1970
    • Millennials: 4.9% since 1990
    • Gen Z: 3.9% projected (22:38)
  • “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.” (23:20)

4. Hedging the Stock Market: Conversation with Amy Wu Silverman (RBC)

(27:20–41:03)

• Recent Surge in Hedging Demand:

  • Post-election optimism (the so-called “Trump put”) gave way to increased anxiety due to tariff concerns and geopolitical events.
  • “...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 terrorists might actually get implemented..." (27:27)

• How Hedging Appears:

  • Rising demand for put options signals increased investor caution; this appears in “skew”—the difference between prices of puts vs. calls (28:44).

• Do Hedges Work?

  • Systematic put strategies don’t always succeed; 2022 example: market fell 20%, systematic hedgers lost 21% (30:17).
  • "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...if the market falls in like too orderly of a fashion, then you actually don't get that juice you typically would expect." (30:34)

• Market Correlation & Hedging:

  • Hedging may become more effective as individual stock moves become increasingly correlated due to macro events and political catalysts, rather than company-specific events.
  • "If correlations start to rise...you can bet the volatility will rise, too." (33:10)

• Signals from Derivatives Markets:

  • Skew inversion (when call option prices outpace put prices) has signaled market momentum (e.g., the AI/Nvidia rally, meme stock fever).
  • “We've seen something in the past few years which we call skew inversion... that's been an early signal of momentum." (34:54)
  • Currently, momentum is “sucked out of the market,” and the host/guest suggest watching for rising implied correlation as a real warning sign (36:32).

• Retail Option Writing (Covered Calls):

  • Writing calls (“overwriting”) can be a useful source of income, particularly if one believes equity upside is limited in the near term.
  • Such strategies can also help fund the cost of protective puts or collars.
  • “I absolutely think there is a place for it ... particularly as we get to kind of these valuation levels that I think make people take a second look.” (37:42)

• Structural Market Changes:

  • The advent of same-day expiry (“zero DTE”) options trading has shortened the effective warning time for market shifts.
  • “Structurally we've had massive duration shrinkage in the options market. ... it’s kind of like only giving you about 10 feet to make that left turn now.” (40:06)

Notable Quotes

• On the S&P 500’s dominance:
  "It makes you wonder how long this can last. Dominant markets do not have to lose their place ... all that really has to happen is for the good news to be fully reflected in the share prices." — Jack Hough (06:56)

• On international diversification:
  "For American investors, it hasn't really turned up yet in real world results... Even for a US investor, it makes sense to diversify internationally, but it's not guaranteed." — Jack Hough summarizing Paul Marsh (12:00)

• On 60:40 portfolios:
  “What we're talking about today is thinking about personalization...you could actually benefit by by tilting your portfolio.” — Jomana Selehin (41:56)

• On hedging with options:
  “If it were that simple, then I think my job would be too easy ...your hedges don't always pan out the way you expect them to.” — Amy Wu Silverman (30:17)

• On options market structure:
  “...there are options that expire within the day. ... It's kind of like only giving you about 10ft to make that left turn now... there’s going to be some potholes ahead and it’s likely we won’t be getting as much of a signal ... as we did in the past.” — Amy Wu Silverman (40:06)

Timestamps for Key Segments

• 02:17 – Is Your S&P 500 Fund Still Enough?
• 05:36 – New Data: 125 Years of Global Investment Returns
• 11:44 – The Paradox of International Diversification
• 13:09 – Bond Returns and Drawdowns
• 19:31 – Global Market Concentration (US vs Rest)
• 22:38 – Historical & Expected Returns by Generation
• 27:20 – Interview: Amy Wu Silverman on Hedging and Options Strategy
• 30:17 – Real-world Outcomes of Hedging (2022 Case)
• 33:10 – Correlations and the Case for Hedging
• 34:54 – Option Market Sentiment and Skew Inversion
• 37:42 – Covered Calls Writing: Risks and Uses
• 40:06 – Zero DTE Options and Structural Changes

Memorable Moments

• Pop-Culture Asides & Humor:
  • “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.” — Jack Hough (03:17)
  • Movie references: "Gung Ho" and Blockbuster Video, illustrating cultural contexts of market anxiety (08:42)
  • The “paddling duck” analogy for market volatility beneath the surface (27:55)
  • Jokes about generational returns: “Can you put in for a transfer to a different generation?” — Jack Hough to Alexis (23:08)

Conclusions

• S&P 500 remains a strong, relevant core holding, but future returns are expected to be lower.
• Diversification, especially international, remains theoretically robust, though history has not rewarded US investors for venturing abroad—yet.
• The 60:40 model endures, but investors should adapt portfolios with personalization and flexibility in mind.
• Hedging with options is nuanced—effective timing and strategy are more crucial than ever in a rapidly shifting options market.
• Market concentration and generational shifts should both be watched, but do not demand panic or dramatic repositioning.

For investors: Resilience, broad market exposure (like the S&P 500), sensible allocation of bonds, and measured, well-timed use of risk management tools remain the main takeaways, with a clear-eyed expectation of modest future returns.