October has been a spooky month for investors. The Black Monday stock market crash happened on Oct. 19, 1987, when the Dow Jones Industrial Average plummeted nearly 22%. October 1929 was also a brutal month for the market, as the Dow plunged almost 13% on Oct. 28 (the original Black Monday) and nearly 12% the following day (Black Tuesday). Add in October 2008 (a 9% decline on the 15th and a 7.6% drop on the 9th) and Oct. 27, 1997 (a 6.8% decline), and the month has earned a reputation for being dangerous for investors.
There are reasons to be a little bit apprehensive as we enter October. The S&P 500 Index (^GSPC -0.25%) is at its most concentrated level since 1965, while the Shiller CAPE ratio recently hit its highest level since the dot-com bubble. Add in elevated inflation, the upcoming midterms, and rising bond rates, and it’s easy to feel uneasy as October begins.
However, despite its history of stock market crashes, October isn’t the stock market’s worst month (it’s actually September). That’s why investors shouldn’t start panicking. Instead, it’s a more reasonable moment for getting more defensive. Here’s my defensive playbook for October.
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October’s up and down history
Five of the S&P 500’s 10 biggest single-day declines since 1981 have happened in October. The Panic of 1907 also occurred in October, as did several of the crashes in 1929 that led up to the Great Depression. Meanwhile, the VIX (a measure of stock market volatility also known as the fear index) has historically spiked in October.
Given all this, you would think that October has historically been a down month in the stock market. However, it’s the exact opposite. Since 1928, stocks have risen by an average of 0.6% in October. While some of the biggest crashes have happened in October, some of the biggest rallies have also occurred because they follow September, which has historically been a down month in the market. October 2022 was one of its best months in history, with the Dow Jones rallying 12% while the S&P 500 rose 6% during that year’s bear market.
Playing defense while keeping the offense on the field
I think October is a good month to get more defensive. The market is currently pricy, and we’re heading into the mid-term elections with one of the biggest energy supply shocks in history still unfolding. One of the best ways to take a more defensive stance is to shift some capital into companies that generate durable cash flows.
One position I’m building right now is WM (WM -1.53%). You need your trash and recyclables collected each week, regardless of whether the economy is expanding or contracting. As a result, the leading provider of environmental solutions generates very durable cash flows. The company uses its stable, steadily rising cash flows to invest in growing its business (acquiring smaller waste management companies and investing in recycling and landfill renewable natural gas production facilities). It has plenty of cash left over to return to shareholders through a growing dividend and meaningful share repurchase program. WM has increased its dividend for 23 straight years (an 8.7% compound annual growth rate over the past decade) and repurchased 12.4% of its outstanding shares since 2015. With its stock price currently down more than 15% from its 52-week high, it’s a bargain buy for those seeking a more defensive holding. Its beta of 0.56 implies its stock is typically about half as volatile as the S&P 500.
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Another great defensive holding is Realty Income (O -1.04%). The real estate investment trust (REIT) has outperformed the S&P 500 in 11 of its 13 corrections (10%+ declines) since going public in 1994. With a beta of 0.5, it’s also half as volatile as the S&P 500.
The REIT owns a diversified portfolio of retail, industrial, gaming, and data center properties secured by long-term net leases with many of the world’s leading companies. Those leases provide it with very durable rental income, as 91% of its retail rent comes from tenants in non-discretionary, service-oriented businesses that have remained resilient across economic cycles. That stable income supports Realty Income’s steadily rising monthly dividend (136 increases since 1994). With a nearly 6% dividend yield, Realty Income’s monthly dividend can provide a real return in October and beyond.
Don’t let October’s past spook you out of the market
The stock market has certainly endured some challenging Octobers. However, that doesn’t mean this month will bring the next crash. That’s why investors shouldn’t panic. Instead, take the warning signs seriously by taking a more defensive posture. That will preserve your upside if October lives up to its reputation as a positive month, while providing your portfolio with more protection if it doesn’t.
