Worst week on stock market since 2008 stuns some of Minnesota's top money managers

The worst week on the stock market since 2008 surprised some of Minnesota's top money managers and forced them to re-evaluate short-term forecasts and tactics.

"Clearly this week markets were trading on emotion," Carol Schleif, deputy chief investment officer for Abbot Downing in Minneapolis, said Friday. "Today, the only emotion it is trading on is fear."

For the fifth day in a row, stock prices swung lower and major indexes lost 12% in value as investors tried to assess the effect of the spread of coronavirus.

Market sentiment shifted from "FOMO to FOCO," the fear of missing out on a bull market to the fear of coronavirus outbreak, said Craig Johnson, technical market strategist for Minneapolis-based Piper Sandler Cos.

Schleif said she was surprised how quickly investors dropped their focus on fundamentals of corporate performance and valuation.

"When you get complacent about things, your time horizon goes way out into the future and you continue to project good times," she said. "When fear creeps in, your future thinking is 30 seconds from now."

Professional investors have been able to create models of other external events — like government shutdowns, worker strikes and Brexit votes — that drove other recent, but smaller, downturns in the markets.

But he said he wonders if this week's disruption will produce a U-shaped curve, meaning recovery will take longer.

He still thinks it's possible for stocks to end 2020 slightly higher than they did 2019, even reaching his forecast for the S&P 500 index to finish the year around 3,600. That would require a 22% climb from Friday's close of 2,954.

"It looks like to me that we can still achieve 3,600 by year-end," Johnson said. "We are just going to have to be a bit more tactical and nimble to get there, and I'm not sure that this sell-off that we have now has fully run its course as of yet."

For Johnson and other investment professionals, though, a one-week sell-off — even one as large as this week's — is not usually enough to re-evaluate your long-term perspective.

"If you are a long-term investor looking to invest for your retirement — 10, 15, 20 years out — you probably don't care. You should probably ignore the noise. If you are a trader, obviously you care," Johnson said.

So it does have some investment professionals advising a bit more than hold the course.

"It is important for investors to realize the increased risk that now permeates the stock market. It is equally important to recognize that this panic is doing what panics do (and it has done so very quickly): gut-check overly positive sentiment; lower competitive yields; and significantly cheapen the valuation of stocks," Jim Paulsen, chief investment strategist at Leuthold Group in Minneapolis, wrote in a note to investors Friday.

Schleif had been advising clients with immediate cash needs to rebalance their portfolios and take some money off the table in the back half of 2019 and at the start of the year. On Friday, she said that investors who did that and have some cash to deploy may want to tiptoe back into the market.

She cautioned the market may not have bottomed out yet, though stocks rallied in the closing minutes of trading Friday.

"Hopefully the emotional flooding has ceased and a calm weekend re-examining risk reward will tee up a better next week," Schleif wrote in an e-mail after the market closed.

"A stock market that is up a lot is vulnerable to two things. I think of it as either an endogenous threat or an exogenous threat. This is an exogenous event," Robillard said.

Right now, he categorizes the novel coronavirus as an external event that will have a shorter time frame. He generally gets more concerned about internal factors that can reshape markets.

"I fear endogenous financial market collapse more than exogenous things," he said. "Experience has taught me that exogenous events get handled differently by the market."

The coronavirus could develop from an exogenous event to an endogenous one if it results in a longer-term global economic slowdown, but right now he doesn't see it that way.

"There is only one end of the world, and this probably isn't it," Robillard said.