In a recent article at WSJ.com, the author interviews Michael Hartnett, a primary investment guru at Merrill Lynch. The top strategist explains that commodities, emerging markets, high-yield bonds and small-cap U.S. stocks are the “four classic canaries” in the investment mines. Moreover, he warns, the archetypal canaries have stopped singing. Yet Hartnett simply views the absence of sound as a harbinger of increased volatility. I might find humor in the overtly bullish take were it not for the precarious environment for risk-taking. After all, when birds stop chirping in coal mines, they’re dead.
In truth, several of the four canaries have been sickly for months. On small-cap woes:
July 30. Tactical Asset Allocation And the Understanding of Longer-Term Trends
July 16. Why U.S. Small Cap ETFs Are Losing Their Way
On commodity depreciation:
August 20. Is the Depreciation in the Commodity ETF Space Surprising?
August 13. These 5 Charts Are Killing Risk-On Exhilaration
More recently, higher-yielding bonds have widened their spread against Treasuries. If you have been willing to take the risk associated with “high yield,” I recommend that you do so in the context of exchange-traded vehicles that actually mature like individual bonds. When you redeem shares of a popular fund like SPDR High Yield Bond (JNK), the sale may result in a capital gain or loss. The loss might even be rather severe. In contrast, holding an asset to maturity like Guggenheim BulletShares 2015 High Yield Corporate (BSJF) implies that you will collect the income payments as well as the return of principal of the diversified basket’s high yield corporates maturing in 2015.