The Negative Indicator for Stocks You Missed

Risk-off! Yesterday's stock market decline accelerated today, as the Dow Jones Industrial Average (INDEX: ^DJI  ) and the broader S&P 500 (INDEX: ^GSPC  ) declined 1.5% and 1.4%, respectively.

The macro view: This morning, one of the people I follow on Twitter retweeted a Bloomberg article dated yesterday and preceded it with the comment "And so it begins...". In light of today's stock market action, perhaps I should have paid it more attention as an indicator of a shift in sentiment. According to the article, on Tuesday, investors redeemed 2.4 million shares of the iShares iBoxx High Yield Corporate Bond Fund (NYSEMKT: HYG  ) -- the largest daily redemption in the ETF's five-year history. High-yield (or "junk") bonds are issued by less creditworthy companies; in terms of risk, they lie between investment-grade bonds and equities. HYG is the largest high-yield bond ETF.

As the following chart shows, a month ago, the year-to-date total returns for stocks and junk bonds were more than satisfactory, but they've hit an air pocket since then. In fact, in October, as yield-starved investors continued to put money into high-yield bonds, the yield on the B of A Merrill Lynch U.S. High Yield Master II Index bottomed at 6.27% -- its lowest level since the series' inception in 1997 (bond yields and prices are inversely related.)

HYG Total Return Price Chart

HYG Total Return Price data by YCharts.

At Tuesday's value of 6.68%, the yield on the Master II Index remains historically low; similarly, even after today's drop, the S&P 500 is valued at 20.4 times its cyclically adjusted earnings, which is at the top end of the multiple's historical range. Continued declines in high-yield bonds and stocks should surprise no one. However, if you want to combine high-yield and high-quality franchises, look no further than the 3 Dow Stocks Dividend Investors Need.


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