Stocks finished the week on a positive note, with the Dow (DJINDICES:^DJI) and the broader S&P 500 (SNPINDEX:^GSPC) gaining 0.4% and 0.5%, respectively. However, this week marks the Dow's fourth consecutive weekly decline; the S&P 500 also lost ground this week, as it has done in three of the past four weeks. The S&P 500 is now 7.2% below the high it achieved on September 14th.
The macro view: Two days ago, I highlighted a news item in this column according to which the iShares iBoxx High Yield Corporate Bond Fund (NYSEMKT:HYG)had suffered its largest daily redemption in the fund's 5-year history. Today, PIMCO's Bill Gross, who manages the PIMCO Total Return Fund, the world's largest bond fund, tweeted:
Gross: Stocks are down because taxes on Capital are going up. HY Bond liquidity is declining.— PIMCO (@PIMCO) November 16, 2012
Junk bonds have had a great run in this yield-starved environment. At the end of October, the trailing 10-year inflation-adjusted return on the BofA Merrill Lynch US High Yield Master II Index was 8.3%. The last time the trailing 10-year return was higher than that was near the top of the previous cycle in January 2001, when it reached 8.7%. Personally, I sold my position in the HYG ETF from the model asset allocation portfolio I maintain, at the end of August.
The micro view: Dow component JPMorgan Chase (NYSE:JPM) is taking a $300-million slap on the wrist to settle charges by federal regulators relating to the sale of mortgage-backed securities during the credit bubble era. Per the standard agreement, JPMorgan will neither admit to, nor deny, wrongdoing; the charges pertained to both Bear Stearns, which JPMorgan acquired in 2008, and to JPMorgan's own activities prior to that acquisition. Ho hum.
While I don't condone the behavior that was the object of this settlement, JPMorgan remains one of the best-run banks, with some of the highest business standards in the industry. I don't think one need feel guilty about owning their shares. Furthermore, they look like a pretty good risk-adjusted opportunity right now. To get a comprehensive assessment of the upside, click here to receive our premium report, which includes 12 months of ongoing coverage.