“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.

“The inevitability of declines is undeniable—our job is to prepare clients for that inevitability,” he says. “Back in July, we told clients in a newsletter to be prepared for a 10 percent decline. That does not make us prescient.”

The current situation is not an indication of a weakness in the system. “This is a technical, not a fundamental, problem,” he says.

At Hartford Funds, John Diehl, senior vice president of strategic markets, says his first indicator of the upcoming correction was investor sentiment.

“There’s been a general anxiety with the market having as long of a run as it has,” Diehl says. “It’s human nature. We were overdue for something.”

There is no reason to fear the system is broken, adds Charles Schwab Investment Management’s Omar Aguilar, CIO of equities. “The U.S. economy is stable and resilient and the recent increase in volatility seems to be exaggerated.”

Although emerging markets, and in particular China, “will continue to face headwinds driven by low commodity prices, increased currency volatility and overall slowdown of local economies, we expect developed markets to stabilize, supported by aggressive monetary policy in Europe and Japan,” Aguilar says.

At Deutsche Asset & Wealth Management, Adam began to hedge in advance of the correction.

“In the portfolios we manage, we had already raised some cash,” Adam says. “We have also favored developed markets versus emerging market equities, because the time to invest in emerging markets more aggressively is when those economies are expanding, not contracting, versus developed market economies.”

The time is right to buy, Adam adds, but managers should be selective.

“The message should be that the equity markets have fallen, but don’t panic,” Adam says. “If you wanted to increase your allocations all along, now is a good opportunity to put your money to work if you have at least a 12-month time horizon. We like U.S. equities, European equities and Japanese equities with a currency-hedged basis, because I think the dollar will continue its long-term trend of strengthening.”

Almost paradoxically, the downturn may have increased the prospects for growth over the next three quarters.

“We’ve become incrementally more positive on the market,” Adam says. “We were projecting the S&P 500 to be at 2,160 in June of next year. This June it was around 2,130; that’s 2 to 3 percent growth. Now it’s closer to 1,900, so you’re talking about 15 percent projected upside. If you have cash on hand, now might be a good time to put it to work. Valuations were at 18.1x, now they’re closer to 16x. They have become fundamentally more attractive this week.”

United’s DeLorenzo has recommended her clients keep at least one year’s worth of expenses as cash on hand in current conditions.

“If the economy takes a turn with interest rates low, we increase the cash on hand to two years known expenses,” DeLorenzo says. “It helps the clients not to panic when they have enough on hand to pay their mother’s in-home nursing care or their child’s education expenses.”