WASHINGTON – We missed submitting a column Wednesday partly due to extraneous matters. But it was also partly due to our utter inability to characterize September’s stock market storm. Unfortunately, that roller coaster market has been on a sickening, vertical downslope all month. If investors were lucky enough to spot the early sell signals and bail out at the September 2 summer bull market top, they came out OK. If not… Oh, well…Put us partially in that latter category. But one bright note in our portfolios is our moderately outsized holding of preferred stocks.
A partial strategy for escaping September’s stock market storm
One way we escaped some of September’s stock market storm was by following the suggestions of Innovative Income Investor’s Tim McPartland. Tim has run this and earlier sites for quite some time now, and he’s become an expert on managing portfolios made up almost exclusively of preferred stocks. And in this market, preferred stocks can help smooth out at least some of those violent, daily bumps.
These strange animals are little understood by the average investor. Preferred stocks look like common stocks. They trade like common stocks. But they also share characteristics of bonds. This means that preferred stocks are issued at a set price – usually $25 per share – and carry a (usually) permanently fixed interest rate, just like a bond.
When they begin to trade, preferred stocks tend to trade just like a bond, moving higher when prevailing interest rates drop, and moving lower when interest rates rise. Why? Because, like bonds, their fixed interest rates joust with prevailing interest rates, which change every day if not every hour.
However, like a bond, you know that when these stocks mature, the holder will get reimbursed $25 per preferred share no matter what that investor paid per share when he or she purchased a given preferred.
More about preferreds
While preferreds trade on the open market like common stocks, they differ in two major ways.
Preferred shares carry no voting rights; and
The dividends of preferred shares are senior to those of common shares. That means that if a company runs into financial headwinds, they might have to cut or eliminate the dividends they pay on common shares. But only after they cut those dividends entirely, can they cut or eliminate the dividends on their preferreds.
There are other rules in play as well, plus there are actually different varieties of preferreds. But will visit those nuances another day. Suffice it to say, however, that if you buy reasonably high-quality preferred shares for your portfolio, well, they will go up and down a bit like common stocks.
But usually, the ups and downs are far less significant than they are for common stocks. So, in general, these shares tend to retain most of their value, even in bear markets. And they’ll pick up, price-wise, when the economy continues to improve.
Let’s not forget: Regular dividends can keep the investment dam from bursting
Meanwhile, through all the sturm und drang, you’ll keep getting those steady, regular, quarterly dividends. (Preferreds generally pay dividends quarterly, while their bond cousins usually pay semi-annually.)
The preferred portion of our portfolio, consisting mostly of preferreds discussed by Tim and his regular (and very well informed) commenters, has generally been quite steady in an investing sea that’s frequently disrupted these days not by 30 ft. waves, but by substantial tsunamis, both up and down.
The current state of equities
Regarding the current market climate, Tim McPartland had this to say in his Thursday morning comments.
“Almost without doubt equity markets are waiting on stimulus from congress. Like a junky looking for their next ‘fix’ this market is built on the Fed printing press and the big spenders in the government. Actually after all the months of crazy large gains in common shares it is nice to see a little reality come into the picture.
“Income investors aren’t seeing many bargains in issues above average quality. The average $25/share preferred or baby bond [another stock-like investment similar to preferred stocks] is off just 1.3% this week–and given the level income issues have been trading at most are still at sky high levels—although given the other options available it is understood. Watching the utility issues, where I would like to buy, we have seen a 1% drop in values–still presenting a pretty lousy yield to call picture, but maybe that is simply the way it will be in the future. A number of commenters have noted the low coupons that are being garnered in the bond market–30 year notes down in the 2.5-3% area–why issue high coupon preferreds?”
That’s pretty good advice.
On the other hand, nasty-looking storm clouds continue to gather on the political horizon.
If we continue to retreat from common stocks, we’ll still likely hold on to our preferreds. Yes, they move up and down, too, but not much. They add an element of stability in times like these, in which economic news is not very good. And we didn’t even mention that the once totally assured stability of the United States as a nation remains under active, violent attack. A resurgent band of hard-core leftists continue to work 24/7 to undermine what remains of American culture and its institutions. Though few in number, these Marxist fascists seem determined to mount a final, violent, Marxist revolution here. That influence on our September stock market storm seems to get worse every day.
Worst of all, these “revolutionaries” — mostly coddled white kids schooled in leftism by the leftist college professors who indoctrinated them with mom and dad’s money — have taken over one of America’s traditional political parties, which most of its members still can’t seem to grasp. And even worse, assuming that possibility, think about this. A small cadre of super-rich globalist capitalists actively and lavishly fund and equip these violent revolutionary storm troopers. (Indirectly, of course.) Karl Marx’s head would be spinning if he could watch this one playing out. It’s so outrageous that no one gets it.
Beware November 3
All this is coming to a head on November 3, and likely long thereafter, as the leftists have now virtually assured that election night results won’t be the real results until they’ve finished creating enough mail-in ballots AFTER the election to assure their complete and total victory.
It’s a colossal and genuinely scary scenario, and it’s generating the massively negative headlines that’s holding the economy back. And, as if by design, the constant and very likely unnecessary state of house arrest that most Americans continue to endure ensures that “normalcy” won’t return soon.
That’s why the market will remain treacherous, likely through at least the end of 2020. October usually brings positive “seasonality” back to the markets, mainly because Christmas-oriented sales ramp up consumer buying in the calendar year’s final fiscal quarter. But, if you think about it, Mr Market never guarantees a positive return on investment (ROI).
So hold onto your hats. And consider paring those investment portfolios, save, perhaps, for a portion you might devote too much safer (but never guaranteed) preferred stocks.
– Headline image: Does this photo look familiar today? Kristallnacht (1938), shop damage in Magdeburg. Image via Wikipedia entry on Kristallnacht. License: Bundesarchiv, Bild 146-1970-083-42 / CC-BY-SA 3.0.