We didn’t have a market crash in October – no repeat of 1929.
That’s the good news.
The bad news is it was a lousy month for stocks. Typical for October.
In Toronto, the S&P/TSX Composite Index dropped 541 points (3.4 per cent) over the month.
On Wall Street, the Dow Jones Industrial Average ended the month down 1,280 points, or 4.6 per cent. Nasdaq lost 2.2 per cent, while the S&P 500 was off 2.8 per cent.
The S&P 500 result was better than the 4.7-per-cent average loss for down Octobers over the period from 1928 through 2019, according to data published by Yardeni Research.
Still, it’s a concern when we consider that about 60 per cent of the companies in the S&P 500 have now reported third-quarter results, with about 85 per cent of them beating expectations, according to FactSet. Clearly, investors don’t believe those results are sustainable, despite the strong rebound in the American economy in the third quarter.
Until recently, it appears investors were looking beyond the pandemic and hoping for signs of a rapid recovery. A few may have actually believed U.S. President Donald Trump’s repeated assertion that the novel coronavirus would simply “go away” or his more recent mantra that we’re “rounding the corner.” More likely, they were pinning their hopes on the early approval and dissemination of a vaccine.
It appears that few people actually believed that the second wave of the virus would be worse than the first, even though many infectious-disease specialists warned of the possibility. Suddenly it is upon us. Many countries are shutting down, hospitals in Europe are being pushed beyond capacity, and many investors have turned from optimists to pessimists.
Maybe October was a blip. The run-up to a U.S. presidential election historically tends to see a market drop as investors struggle with uncertainty. But we may be in for a least a few weeks of high volatility. Continued escalation in COVID-19 cases will heighten fears of a reversion to the dark economic days of last spring. That could be compounded by political concerns in the aftermath of the U.S. election.
For income investors, the key is to keep your cool, whatever happens. Always remember your main objective: steady, dependable cash flow. The price of the securities you own is not your primary concern. They will change from day to day. What matters is a company’s ability to maintain its dividend distribution through good times and bad.
For example, the S&P/TSX Capped Financials Index was off almost 18 per cent year to date as of Oct. 30. But only one Canadian bank, Laurentian, has cut its dividend. None of the others are expected to do so. So, while the market value of your bank stocks is temporarily down, your income has not been affected.
In times like these, it’s essential for income investors to maintain their composure. Don’t panic and sell quality securities. The only reason to dispose of a stock now is if you believe the company is in a weakened financial state and a dividend cut is coming.
Otherwise, ride it out. We should have a vaccine ready by the middle of next year, and at that point a more meaningful market rally – one fuelled by reality, not hope – can begin.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape