If the Stock Sell-off Turns Into a Market Correction, You'll Have to Play Defense

Investors seeking defensive strategies amid heightened market volatility may find promising opportunities in specific stocks identified for their resilience. The recent market turbulence followed the Federal Reserve's last meeting of the year, during which it reduced interest rates by a quarter percentage point.

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However, the central bank tempered expectations by signaling just two rate cuts for next year, down from the previously anticipated four. This announcement triggered a sell-off, resulting in the Dow Jones Industrial Average experiencing its longest daily losing streak since 1974.

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Although stocks managed a rebound on Friday, the volatility is unlikely to dissipate entirely. There remains a risk of a market correction, defined as a decline of 10% or more. To prepare for such scenarios, CNBC Pro conducted a screening for stocks that can help investors adopt a defensive stance. The criteria included stocks with low beta, indicating reduced sensitivity to market swings; a dividend yield of 3% or higher; strong year-to-date performance; and limited declines of less than 2% during the week through Thursday.

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Defensive Stock Picks

The screening process highlighted several stocks meeting the criteria, as detailed below:

Key Highlights

• Biopharmaceutical Companies:
  Gilead Sciences and AbbVie stand out as low-beta stocks that exhibit minimal correlation with broader market movements. Gilead boasts the lowest beta in the group (0.20), indicating exceptional stability. Both stocks have sustained year-to-date gains exceeding 10% while recording weekly declines of less than 1%.
• Utilities Sector:
  Utility stocks, often considered safe havens during market instability, feature prominently on the list. Companies like Duke Energy and American Electric Power combine low beta with attractive dividend yields of 3.90% and 4.08%, respectively. Southern Company and Ameren Corp also meet the criteria, offering solid year-to-date returns and stability amid the week’s market turbulence.
• Entergy Corp:
  Entergy is the top performer in the group with a remarkable 47% year-to-date gain. Unlike most peers, it also managed a marginal weekly increase, reflecting its resilience. Its dividend yield of 3.22% adds further appeal to income-focused investors.
• Dominion Energy:
  For investors prioritizing dividends, Dominion Energy offers the highest yield on the list at 5%. The stock has delivered a year-to-date gain of 12.74% and limited its weekly loss to 1.94%.
• PPL Corp:
  Another noteworthy utility, PPL Corp, combines a beta of 0.86 with a dividend yield of 3.22%. It has achieved an 18.16% gain for the year and kept its weekly decline below 1%.

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The identified stocks provide a mix of income and stability, making them suitable for defensive positioning in uncertain markets. Low-beta stocks are particularly advantageous for mitigating risks, as they tend to experience smaller price fluctuations relative to the broader market. Additionally, dividend-paying stocks offer a steady income stream, which can help offset potential losses during volatile periods.

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Investors should note that while these stocks have shown resilience, market dynamics remain unpredictable. Diversification and alignment with individual financial goals and risk tolerance are essential when adopting any investment strategy.

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As the Federal Reserve’s policy changes continue to influence market sentiment, defensive investing becomes a prudent approach. Stocks such as Gilead Sciences, AbbVie, and Entergy demonstrate characteristics that align with this strategy, including stability, income potential, and consistent performance. By focusing on low-beta stocks with robust dividends, investors can better weather the uncertainties of an increasingly volatile market.

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