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.)
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.