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After wild week in markets, experts split on what to do next

By Tomoeh Murakami Tse
Washington Post Staff Writer
Sunday, May 9, 2010; G01

NEW YORK -- Just as small investors were finally returning to U.S. stocks, the market exploded in a wild week of erratic trading that drove major stock indicators back into the red for the year.

The whipsaw has left people of two minds: Some investment professionals are urging caution. They say the market may be in for a steeper decline, noting that U.S. stocks have surged nearly uninterrupted for 14 months. But others say the past week provided them with a golden opportunity to buy before another upswing.

"I see this as a clear-cut opportunity to buy stocks a lot cheaper than they were two weeks ago," said Harry Rady, chief executive of Rady Asset Management, a hedge fund and mutual fund management company. "We used up almost all of our cash in the last couple of days. We've been buying hand over fist."

Underpinning Rady's buying spree is his belief that debt problems in Europe will not derail the U.S. economy and that governments overseas will soon have a bailout plan finalized for Greece. "I wouldn't be surprised to see an announcement this weekend," Rady said Friday evening.

Others remain wary. They say that even as investors move past the computer-driven white-knuckle plunge of Thursday, when the Dow briefly lost almost 1,000 points, much uncertainty remains about the strength of the U.S. economy and those overseas.

"Clearly the market is being driven by macro concerns," said Daniel Berenbaum of Auriga, who focuses on technology shares. "Even though things are getting better, stocks . . . have possibly raced far ahead of that."

One thing is certain, analysts say: Brace yourself for a bumpy ride.

"Get used to volatility," said Jerry Webman, chief economist at OppenheimerFunds.

The Chicago Board Options Exchange's volatility index shot up last week, closing Friday at 40.95, its highest level in more than a year.

"Images in Greece of riots is disturbing," said Mark A. Coffelt, president and chief investment officer of Empiric Funds. "This is a crisis that is slowly unfolding. . . . I think a lot of investors are saying this could be the United States in a few years if we don't get our act together."

The investment mood this week was a scene reminiscent of the darkest days of the financial crisis.

Investors around the world pulled their money from stocks, junk bonds and other risky securities. Oil prices tumbled. Meanwhile, gold, seen as a safe haven for investors, rose to its recent highs.

The week started off with promise. On Monday, investors welcomed reports of rising auto sales and manufacturing activity as the latest sign of an economy on the mend. Shares soared.

On Tuesday, U.S. stocks suffered their worst day in three months as the Greek debt crisis took center stage, igniting fears about its spread across Europe and beyond.

Investor confidence was rattled further Thursday when apparent trading errors and high-speed, automated computer programs prompted the brief but unnerving nearly 1,000-point drop in the Dow Jones industrial average.

By Friday, even an upbeat jobs report could not calm roiled markets. By the time the closing bell rang on the New York Stock Exchange, the blue-chip stock index was down 5.7 percent for the week, its worst performance since the depths of the financial crisis more than a year ago. Crude oil futures plunged by nearly 13 percent for the week.

It's enough to make any retail investor head for the hills. With memories of the financial crisis and the pain it unleashed in retirement funds fresh in their minds, mom-and- pop investors had largely stayed on the sidelines, pulling money out of mutual funds that invest in U.S. stocks even as the Dow soared over the past year, according to industry data.

But as positive economic reports mounted in March, the latest data available from the Investment Company Institute, U.S.-based mutual funds that invest in domestic stocks saw inflows of nearly $3 billion, compared with outflows of $4.5 billion the month before.

Tom Villalta, lead portfolio manager at Jones/Villalta Opportunity Fund, said it might not be a good idea for long-term investors to reverse course based on the activities of the past week.

"We've got Greece, which appears to be falling apart. We've got a global recovery that now appears less than assured. We've got trade errors," he said. "At the same time, the [domestic] economic trajectory remains intact. The employment pictures to be turning the corner. Much of the data we've had in the last few months have generally been good. Meanwhile, we have a relatively low interest rate and low inflation environment, which is a really good backdrop for owning equities in general.

"We certainly don't expect things are going to be a linear trajectory," he added." But I think we have to keep our eyes on the larger picture."

Investment professionals said people should think carefully about their time horizons and advised against going into the stock market for those who might need to access cash in the next three years.

Another word of advice: Temper your expectations.

"Investors should not anticipate, over the next three or four years, very robust returns," said Robert Millen, chairman and portfolio manager of Jensen Investment Management.

He said consumers, especially in the United States, are unlikely to resume their freewheeling spending anytime soon; in an economy driven by consumers, that bodes for a fairly slow recovery despite recent indications of a pickup.

"If investors can get middle to mid-high single-digit returns," Millen said, "they'd be very happy and very satisfied given the overall macro-economic outlook for the world."

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