If you’re just a bit more worried about a market sell-off going into the fourth quarter, you’re not alone. The market’s speedy recovery from the near-correction that began this July seems too good to be true for some. After all, it’s not too often we get a so-called V-shaped recovery from nasty plunges on the back of rising recession fears.

Indeed, rate cuts and more dovishness on the Fed’s part may offset some of the U.S. presidential election-induced market volatility on the horizon. That said, all it takes is one unexpected lackluster economic data reveal to derail the latest orderly rally.

Key Points

• Investor unease about another market pullback may be warranted.
• Playing it defensively amid rising valuations seems prudent.
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Risks Remain as the S&P 500 Eyes New Highs

It certainly feels like we’re out of the woods concerning a potential recession, but investors should keep their chins down and their guards up as the S&P 500 flirts with new highs. The valuations on some of the quicker-to-recover names are even higher than where they were at the start of July.

Although timing the markets and a crash or correction from a week-to-week basis could prove regretful, the recent public stock selling spree from Warren Buffett’s Berkshire Hathaway (NYSE:BRK-B) may be a hint that the market’s risk/reward trade-off isn’t all too great going into September. However, whether such profit-taking entails a looming crash, a lengthy consolidation period or something more benign remains to be seen.

In any case, recent stock market momentum and an uptick in selling activity from the Oracle of Omaha are enough to justify proceeding cautiously. Such an approach could entail a preference for stocks with wider margins of safety and lower degrees of market risk (think lower betas).

 

Coca-Cola

Berkshire’s hefty Coca-Cola (NYSE:KO) stake was untouched as it raised cash by selling big names earlier in the year. The long-time Berkshire portfolio staple seems like one of those “untouchable” holdings, given its recession resilience, strong fundamentals, and relative predictability. Indeed, KO stock can take a big hit to the chin at the hands of a market-wide sell-off and get back up to its feet far faster than other names out there.

You won’t get rapid gains that ride on the back of the day’s hottest emerging technological trends with KO stock. However, you will have more predictability in uncertain times, single-digit earnings, and dividend growth over time. For this year, Coke sees organic revenue growth in the 9-10% range.

In an uncertain and choppy market, such relative stability and a more predictable upward trajectory seem good enough to help you invest through the next market hailstorm, whether that entails a 2022-esque bear market or something worse. At writing, the stock is at a fresh new high after popping a respectable 21% year to date.

At 29.46 times trailing price-to-earnings (P/E), the stock’s not cheap. Still, the 2.69% dividend yield and remarkable pricing power demonstrated amid inflation make the name a worthy pick-up if you’re worried about a market pullback. The low 0.59 beta also entails below-average market risk, making KO a great hiding place for investors who doubt the sustainability of the market’s recent relief rally.

Johnson & Johnson

Johnson & Johnson (NYSE:JNJ) is a $400 billion value stock that turned a corner in early July. Since its July lows, JNJ stock has surged more than 14%. As the mega-cap healthcare firm looks to settle its talc baby powder debacle for good, investor focus should shift to the renewed (and recession-resilient) growth trajectory that could lie ahead.

In the latest (second) quarter, the firm saw drug sales rise a respectable 9%, while devices grew 4%. While the drug business could face subtle pressures in the back half of the year as competitive pressures weigh on Stelara, a strong pipeline, and new launches could more than offset such setbacks over the coming years.

Either way, a wave of newer drugs could set the stage for a continued rally in the name, all while the baby powder overhang finally looks to fade. With a solid quarter in the rearview and newfound momentum build upon, I’d be inclined to buy JNJ stock on the way up, even if you think the market’s on its way down.

The stock trades for 25.1 times trailing P/E, and sports a 3.02% dividend yield. With a low 0.52 beta, JNJ stock also stands to be less rattled once the market backtracks again.

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