The TSX Index is down 7.4% through the first four weeks of October, the Dow Jones Industrial Average is down 6.7% while the S&P 500 Composite Index has lost more than 8.6% of its value. It looks like after nearly a decade and one of the longest bull markets in history, the bulls may finally have run out of breath. Sure, markets never actually die of old age, but old age does make them more vulnerable to attacks. In this particular case, there appear to be a few factors that have given Canadian investors reason for pause in October –…
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The TSX Index is down 7.4% through the first four weeks of October, the Dow Jones Industrial Average is down 6.7% while the S&P 500 Composite Index has lost more than 8.6% of its value.
It looks like after nearly a decade and one of the longest bull markets in history, the bulls may finally have run out of breath.
Sure, markets never actually die of old age, but old age does make them more vulnerable to attacks.
In this particular case, there appear to be a few factors that have given Canadian investors reason for pause in October — the most obvious being that it looks like the era of historically low interest rates is finally coming to an end.
On Wednesday, the Bank of Canada raised its official policy rate by another quarter of a percentage point for the fifth time since last summer.
The official rate now sits at 1.75%; however, the rate that the average Canadian household pays on their mortgage is of course significantly more than that.
The second factor is that Canadian households are currently over-extended and thus quite vulnerable to a rising interest rate environment.
Given the accumulation of debt that Canadians have taken on over the past decade by way of larger mortgages and lines of credit to finance automobile purchase and household living expenses, successive rate increases on the part of the Bank of Canada may hurt more than they have in past cycles.
That won’t be a pleasant experience for anyone – even if you don’t happen to be one of the guilty parties.
The third factor may just prove to be the catalyst to set the whole house of cards in motion, so to speak, and that’s the recently renegotiated NAFTA pact.
It remains to be seen exactly how this will all play out, but most agree that the outcome for Canadians will be worse than what it was before the deal went into negotiations.
Whether through lost jobs, inflation from newly introduced tariffs or investment capital flowing out of the country’s borders, the NAFTA deal could be the proverbial straw that broke the camel’s back.
Despite all of this pessimism, however, one stock that has fared better than most has been that of telecommunications provider, BCE Inc. (TSX:BCE)(NYSE:BCE).
BCE stock is down – but less – just a little over 3% after losing 2% of its value in Friday’s session.
There are a number of reasons why this is the case, and why stocks like this tend to do better on average during temporary market declines.
One is that it pays a solid dividend.
BCE shares yielded investors 5.78% annually as of Friday, and what makes it a superior dividend play as compared to other higher yielding dividend stocks is that overall, it’s a fairly simple, stable business.
Services like wireless communication, internet, and perhaps to a lesser extent today, telephony and cable are mainstays of modern life.
Even if household incomes were to fall, most Canadians would be cutting expenditures from other parts of their monthly budgets rather than cutting spending on their wireless or internet bills.
It also doesn’t hurt that BCE stock is trading close to its 52-week lows and has lagged the performance of rival carriers Rogers Communications and TELUS Corporation so far this year, which only serves to add to its value, and making it a timely contrarian play.
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Fool contributor Jason Phillips has no position in any of the stocks mentioned.