What will it take to rock this Teflon stock market? Here’s how to invest, in the meantime.

Along the way, the S&P 500 SPX index,
+ 0.15%
recorded its worst daily drop in four months and momentarily fell below its 50-day moving average before closing on Friday with a respectable weekly gain, just like the Nasdaq COMP Composite Index,
-0.03%.

The story of the week included the Federal Reserve finally confirming that it was going to end its bond buying program, implemented at the worst of the coronavirus pandemic last year, now that the economy is recovering, and also signaling a possible hike in interest rates, although Fed President Jerome Powell pushed back the idea which was a certainty next year.

We emailed Michael Antonelli, market strategist at investment bank Robert W. Baird & Co. if the stock market is bulletproof:

After rephrasing our question and adding a smiley for added effect, here’s what Antonelli said:

Two things to remember: 1). There is a ton of money flowing through our system and when that happens it ends up risking assets like stocks. It has to go somewhere. 2) The stock market is certainly thinking about all of these things you mentioned and dismissing them, but it is also looking at earnings and earnings, both of which are expected to rise in 2022.

Based on earnings expectations and the maintenance of current multiples, Antonelli predicts the S&P 500 could rise to 5,000 by the end of 2022.

Meanwhile, Morgan Stanley’s Michael Wilson is maintaining his target of 4,000 for the broad market benchmark by the end of 2021. In other words, Wilson is looking for a market correction of around about 10% from current levels.

Looks like something has to give?

Lindsey Bell, chief investment strategist for Ally Invest, described the start of the week’s action as a “storm” that “everyone saw coming, but nobody expected it,” a reference to the default. potential of China Evergrande 3333,
-11.61%
with some possibility of financial contagion in global markets.

Bell said this must be good for the stock market bears, which have long expected stocks to pull back, given that the S&P 500 has not seen a 5% or more drop in close since. over 220 days, has turned out to be a naughtiness for this resilient market.

Of course, it was not only Evergrande that stirred the language of market players. MarketWatch presented a list of items that questioned investor optimism, from a fight for federal debt limit in Congress to complacency around monetary policy.

Bell, in a research note on Friday, said it was “difficult to disappoint a market that is brewing for a collapse.”

She said the current outburst of fear emanating from Wall Street could be of the variety that keeps euphoric investors from doing anything reckless.

A survey by the American Association of Individual Investors shows that last week, the number of investors pessimistic or neutral about the market outlook hit their highest level in 14 months.

An increasing decline can be a counterindicator.

“Cautious investors tend to pay more attention to risk and hedge their portfolios, which makes them less likely to sell in times of crisis. Fear can also lead to more margin cash that could come back into the market if prices fall. Typically, the worst sales occur when the market is underestimate the risks, without overestimating them, ”Bell wrote.

However, a number of Wall Street traders and analysts have commented that Monday’s stock drop was marked by a sort of matador, an “out of the way” trading strategy that saw liquidity dry up as it dried up. as the markets collapsed. This is a far cry from the downward buying sensitivity that has characterized much of the retail regime in the markets of late.

So fear can sometimes turn a mundane correction into some sort of deer-like trade in headlights which can lead to a more definitive rout.

One thing that might be worth watching is bond yields. The 10-year Treasury bill TMUBMUSD10Y,
1.454%
the yield climbed on Friday to around 1.45%, with benchmark returns posting the largest weekly gain since March 19.

The rise in benchmark bond yields reflects the Fed’s decision to curtail its bond purchases soon and expectations of higher interest rates next year, but they may also signal acceptance that the economic recovery will continue. despite the spread of the delta variant of the coronavirus.

Powell suggested on Wednesday that perhaps it would take a fairly weak labor market report to derail the Fed’s monetary policy plans.

However, as bond yields rise, the borrowing costs of most companies rise, which may reduce profits. Higher yields could also prompt some risk-averse investors to sell stocks in exchange for perceiving safer yields on government debt.

It should be noted that yields remain historically low and far from the 2% levels that most analysts predicted would be in effect at this point in the economic recovery cycle. Many analysts maintain expectations of returns of around 2% by the end of the year.

Bell has provided a roadmap for if / when things go pear shaped (edited for brevity):

• Exit plan. When buying a stock or a security, have an exit plan in mind. This will prevent you from selling prematurely just because the market is down.
• Balance. The strongest portfolios have a good balance between aggressive and conservative assets.
• Money is not waste: Cash gets bad press these days. Inflation is highSo that’s understandable, but a small stash of cash might be one of your most stable holdings during a market crash.
• Play a little defense: Sectors like utilities, health care and consumer staples tend to resist mass sales better due to their stability.

The main stakeholders of the Fed

Powell will also be busy next week. The Fed chairman testifies before the Senate Committee on Banking, Housing and Urban Affairs Tuesday at 10 a.m. ET, and follows that up with a roundtable with the European Central Bank on Wednesday at 11:45 a.m.

Separately, New York Federal Reserve Chairman John Williams spoke at the Economic Club of New York at noon ET on Monday, along with Fed. Governor Lael Brainard also spoke to the National Association for Business Economics at 12:50 p.m. Monday.

The data

It’s a busy week for U.S. economic data: August durable goods orders report due at 8:30 a.m. ET On Monday. At Tuesday, an August international trade reading is expected at 8:30 a.m., followed by the July S&P Case-Shiller Home Price Index at 9 a.m. and the Conference Board’s Consumer Confidence Index in September at 10 a.m.

At Wednesday, August pending home sales will be released at 10 a.m., and to Thursday, the weekly unemployment benefit claims for the period ending September 25 and the final reading of the second quarter GDP are expected at 8:30 am.

Conclusion next week on Friday, are reports on personal income and expenditure for August and core inflation at 8:30 am; September purchasing manager indices for manufacturing from IHS Markit at 9.45 a.m. and Institute for Supply Management at 10 a.m., as well as August construction and September consumer sentiment from the University of Michigan .

What we have read and written