“Stay calm and carry on” is the message advisors have for their clients at the end of this potentially frightening week.

Although there may be more market bad news to come, the drastic drop earlier this week was long overdue and should not be a source of fear, they say.

“There is an argument to be made that this week’s events will prove to be timely indeed for long-term investors and the global economy,” says Nigel Green, CEO of deVere Group, an independent advisory firm.

“I believe that the events of this week will prove to serve the global economy well in a wider context,” Green adds. “This is because the Federal Reserve and the Bank of England are now less likely to raise interest rates this year, and when they do raise them they are likely to be more cautious.”

Many advisors feel the downturn was foreseeable. Larry Adam, chief investment officer of wealth management for the Americas and chief investment strategist at Deutsche Asset & Wealth Management, declares that the market was fundamentally “quite expensive” ahead of the decline.

“Entering the third quarter, the S&P 500 P/E ratio was 18.1x, and the 10-year Treasury was 233 basis points, so most asset classes across the board were expensive,” Adam says. “Most people were positioned very similarly. Consensus positioning was long the dollar, long tech, long high yield and long European stocks, and those are the areas that have seen the biggest reversals.”
 
Lee DeLorenzo, president of Garden City, N.Y.-based United Asset Strategies, says that from a technical perspective, the market was poised to break out.
 
“I had forecasted increased volatility since the beginning of the year and had written to our client base about it,” she says. “The volatility was not only historically below average, but it had also become range-bound, which is always the indication of a coming breakout. The chance of a breakout to the upside was lower than the chance for a breakout to the downside.”

Joe Davis, the chief global economist at Vanguard, agrees.

“We have not seen a correction for a while,” Davis says. “If the catalyst had not been China, it would have been something else.

“Vanguard’s financial outlook this year was more guarded than at any time since 2006. I think the thing that was more atypical than the correction was the length of time we spent without one. The U.S. economy is resilient, and I think it will continue to drive activity globally.”

On the other hand, Stephan Quinn Cassaday, CEO of Cassaday & Company in Northern Virginia, says that at any given time, the onset, duration and magnitude of market declines cannot be predicted.

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