After last week, Minnesota's stock pros look for more volatility

The stock market closed Friday almost exactly where it did a week earlier. But it was the most volatile week in years for investors, with the Dow Jones industrial average swinging in a wide range of 1,300 points.

The S&P 500 stock index plunged to its lowest point this year on Monday. But after big gains Wednesday and Thursday, the broad market index finished the week 1 percent higher, though still 3 percent below where it started the year.

In December, the Minnesota money managers who ­participate in the Star Tribune's annual Investor's Roundtable forecast a 7.4 percent jump in the S&P 500 this year, a rate that's considered fairly normal growth for stocks.

Even so, many also said they expected a market correction, defined as a drop of 10 percent, to happen at some point this year.

As the wild week wound down, we asked some of the Twin Cities investment ­managers from our roundtable, along with other analysts, for perspective:

Q: How would you characterize this week's market volatility with what you've seen in the course of your career?

Carol Schleif, regional chief investment officer, Abbot Downing: This correction was long overdue; we typically get one 10 percent broad market drawdown every 11 months or so, but it had been four years. I've been in the business more than 30 years and this one has been mild, though scary as they all are to experience in real time. What happened in China this week, with the Shanghai composite dropping 23 percent for the week, happened in the U.S. in 2008 (first week of October) and in a single day in 1987 … While China is problematic in that you have substantially more government intervention into the market than people here realize, fundamentals are ­stable-to-strong in the rest of the world.

James Paulsen, chief investment strategist at Wells Capital Management: Personally, I didn't think it was all that bad, it came back percentage-wise. It certainly wasn't close to the mother of them all in 1987. It doesn't seem like it got that panicky yet. In the past, people were definitely in a panic. People were talking about buying this time. A lot of the time in the other ones, you wouldn't really hear that. The U.S. dollar is lower than when it started. Gold is down. Silver is down. That's something. We might have further to go. We've developed something of a word fatigue. We've developed a psyche of 'We'll get through it,' but that's bothersome to me when people aren't keeping focused on that.

Martha Pomerantz, partner at Evercore Wealth Management: The memory of corrections, meaning declines of 10 to 20 percent, particularly ones that rectify themselves within a short period of time, fades quite quickly in investors' minds — mine included. We may remember the drop at the opening of some 1,100 points on the Dow as it sounded like a big number, but the starting point was higher. By the time the market closed, the market had already made back half its loss.

Biff Robillard, president, Bannerstone Capital Management: Sometimes the capital markets remind me of a modern remake of a classic Shakespeare play where the audience has to guess which play it is and which actor is in which role: who is the Hamlet? Markets "cycle" in vaguely familiar but different ways. This recent market action is well within the realm of my expectations. As investors, we all seem affected with "Chrono-centrism," a belief we live in utterly unique times. Shakespeare's plays of course are relevant because they are timeless.

Q: Is this the correction people have been waiting for, or just the start of it?

Paulsen: We might have further to go on a correction. The market was vulnerable going into this. It was overvalued. There's not that fear yet. There might be fear when we're closer to the bottom.

However, the U.S. economy continues to be resilient. Consumer spending is up on lower gasoline prices, household formation and housing starts are up, auto sales are strong and consumer balance sheets are in a better position than at any time since the financial crisis.

Robillard: The third quarter is often a period of unstable stock markets. Several great bear markets have begun in the third calendar quarter, and many corrections have begun (and ended) there. Interestingly, bear markets often end in October, in the early fourth quarter. Theories abound, but what may be most valuable is the empirical fact: like tornadoes in spring or hurricanes in late summer, it pays to be more alert at this time of year.

Schleif: It may not be a "one and done" event, but we do not think it signals the start of a bear market. Nor does it imply dire consequences for global fundamentals or economies. Things may continue to be lumpy as investors reassess their personal risk profiles, as we deal with increased algorithmic noise in daily markets, and as China continues to try to execute their long-stated intent to shift their economy from a manufacturing-driven one to a consumer-led one.

Q: Will companies react?

Paulsen: At this point, probably not much at all. If we fall again, then there might be some more impact. The longer you stay at the lower levels, if we were there for several weeks, we could see some effect on IPOs, a slowdown of merger and acquisition activity, on buybacks of stock. But that's reaction on financial decisions. The economic reports are more likely to drive [general business] decisions.

Q: What should investors do?

Schleif: Remain calm and act thoughtfully. Don't react emotionally. Remind yourself of what you're trying to accomplish with your investments over the long haul and view this as an opportunity to upgrade positions at more reasonable valuations.