Beware the Return of the Bear
The stock market correction has subsided for now, time to raise cash
Chaos and destruction of a strong US economy mark the first 100 days of Trump’s administration, with ongoing uncertainty around tariffs, inflation, and the potential for future interest rate cuts all still up in the air. Nonetheless, the stock market rallied this week and has regained some of the value lost over the past few weeks. As an income investor, I took advantage of the market correction to add to several of my income holdings, buying more shares at lower prices and thereby increasing my future income stream.
It is often counterintuitive to buy stocks when prices are dropping due to fears of an upcoming recession, or because of concerns that inflation might spiral out of control again due to the constant threats of tariffs triggering a trade war with China and creating consternation with allies of the US like Canada and Mexico. However, as an income investor those fears can lead to buying opportunities because the fundamentals of the companies or funds that are seeing depressed market prices have not changed.
For example, I recently reviewed Dynex Capital (DX) after they reported Q1 2025 earnings. You can read what I wrote on Seeking Alpha if you have a paid subscription:
In a nutshell, the market price tanked due to the broader market correction, yet the stock still pays a dividend that now yields 17% and the fundamentals of the company have not gotten any worse.
The recent market rally this week has lifted the price back up above $12 but it is not too late to add some shares of this well-run REIT.
CLOs Offer High Yield Income at Sale Prices
Other buying opportunities include several of the CEFs (closed end funds) that invest in CLOs (collateralized loan obligations), and particularly those that invest in the equity tranches of CLOs. Some of those tickers include OXLC, ECC, and OCCI.
The outlook for CLOs in 2025 is optimistic even after delivering strong performance in 2024. This insight from Deutsche Bank explains some of the reasons for optimism.
Twelve months ago, sentiment surrounding the CLO market on both sides of the Atlantic was one of recovery, resilience, and clearing hurdles in a path to normalisation. And at the start of 2023, the focus was “weathering the storm” amid rising interest rates, market volatility, and concerns about defaults.
Now, in early 2025, optimism surrounding this asset class is near an all-time high following an “outstanding 2024”, according to Conor O’Toole, Managing Director and Jamie Flannick, Research Analyst at Deutsche Bank Research. For example, new issuance in both the US and EU CLO markets nearly doubled between 2023 and 2024. O’Toole and Flannick note in particular that last year:
The US market saw US$202bn in new issue deal volumes priced, along with US$223bn in resets and US$38bn in the middle market/private credit (MM/PC) deal activity – “all single year records”; and
in Europe “outcomes were nearly as impressive – US$52bn (€48bn) in new issue volume along with US$33bn (€31bn) in resets – well north of the US$28bn (€26bn) and US$2bn (€1.8bn) of the previous year”.
In addition, across both markets, median equity distributions reached multi-year highs, with a 16% annualised distribution in the US across all deals, and 19% in Europe. On average, CLO investors target a 14-15% yearly return, making last year’s performance an upsized surprise. CLOs have consistently performed well and offer investors diversity within their fixed income portfolio.
One of my largest income holdings in my Income Compounder portfolio is Oxford Lane Capital (OXLC). As you can see on the 6-month chart, the price of OXLC dropped by more than -13%, however, the CEF pays a monthly distribution of $0.09 per share which currently represents an outsized yield of nearly 24% based on the current market price. Distributions have already been declared through September of this year.
Will the Bear Market Return?
The point of the above is that during the peak fear stage of a market correction there are often buying opportunities. However, we now appear to have reached a local bottom in the market and the relief rally that the market is now experiencing tells me that the time to buy is now over. With prices rising again, I suggest that income investors should consider accumulating cash to use for “dry powder” for the next market correction.
In my IC portfolio, most of my holdings pay monthly distributions. I tend to reinvest most of those distributions, especially with the CEFs that I hold that offer a discount to reinvest. But this month I intend to turn off the DRIP (dividend reinvestment) on several of those CEFs and take more of my distributions as cash for the next buying opportunity.
Cornerstone Rights Offering
The Cornerstone funds, CLM and CRF, are two CEFs that offer very high yield distributions and also offer the unique advantage of DRIPing at NAV (net asset value). Because those funds tend to trade at very high premiums, typically 20% or more, you get an additional boost to your income by taking advantage of that DRIP discount.
In addition, there is an upcoming buying opportunity for those two funds in the form of a Rights Offering. The RO allows existing shareholders as of April 21 to purchase new shares at 112% of NAV or 80% of market price, whichever is higher at the time the RO closes on May 16. You can read more about the details of the RO here.
If you did not already own shares before the April 21 date, you may still be able to take advantage of the RO when it gets closer to May 16 because the market price often drops, sometimes even below the subscription price for participants in the RO (which will not be known until a few days before the RO ends on May 16).
If you do not already own shares of CRF or CLM, you may want to raise some cash now in preparation for a potential buying opportunity in mid-May when it gets closer to the RO end date. And if you do own shares already, I highly recommend participating in the RO to add more shares at lower than average prices, which also helps to grow the funds’ NAV due to those shares being issued at a premium.
If the bear market returns later this year, which I believe it might, you will want to be prepared. Meanwhile, keep on collecting the income from your existing holdings and accumulate some cash for the next buying opportunity.
Excellent summary and long CRF/CLM/DX. Have a relaxing weekend.