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Wells Fargo’s Adams: Brace for stocks to drop another 10%

Gina Martin Adams started out the year with the lowest S&P 500 target on the street, at 1,850—a wager that stocks would end 2014 roughly flat. That target came a bit closer into view on Thursday, as the S&P 500 slid about 1.5 percent and got as low as 1,937.

But Wells Fargo's institutional equity strategist said on Thursday's "Futures Now" it could get even worse for the market than that target implies.

"You know, our price target for the end of the year implies that we're probably about 5 percent down, at the very least, at some point in the second half of the year," Adams said.

"I would say that you have to prepare yourself for up to 10. Ten is very, very normal in the grand scheme of markets, and would actually be fairly healthy, I think, washing out some of that excess optimism we've developed, and some of the complacency we've developed."

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She says the decline is to be expected, given that the Federal Reserve is pulling back on stimulus. On Wednesday, the central bank reduced its asset purchasing program by an additional $10 billion per month, and is now contemplating when to raise its target on the key federal funds rate.

"When you look at history, it is very typical for the market to start to show some volatility, start to show some weakness in areas when the Fed is shifting gears. And I think that's the overall structure here," Adams said. "We're starting to get a little nervous for what it's going to be like to fly on our own without the support of the Fed behind us, and we're set up for a period of volatility here."

Investors certainly expect volatility to rise. The CBOE Volatility Index (commonly known as the VIX), which measures implied volatility shot up some 20 percent on Thursday to hit a three-month high.

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Traders work the floor of the New York Stock Exchange.
Jin Lee | Bloomberg | Getty Images
Traders work the floor of the New York Stock Exchange.

Of course, not everyone is so concerned. In a Thursday interview, legendary investor Warren Buffett told CNBC that "if they liked buying it yesterday, they should like buying it better today. The day-to-day stuff doesn't make any difference. The trick in investing is to buy good businesses and hold them for a long time and make a lot of money doing so."

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In the greater scheme of things, even Adams would view a broader decline as a chance to buy into the market—though she emphasizes that investors need to become more strategic.

"I'd say in the longer term, as long as the economic data continues to improve, as long as earnings data continues to improve, this is probably a buying opportunity. But you've got to pick your spots carefully amid increasing volatility," Adams said. "I think you want to focus here really on sector strategy. Finding the winners in the index of the next three to six, maybe even 12 months as we experience this period of volatility amidst the Fed shift is going to be really important."

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Still, she agrees with Buffett that it's a mistake to make too much of Thursday's action.

"We're in this one-day sort of trade with a confluence of factors kind of allowing for a degree of capitulation. I'd give it a couple of days before I would call it any type of major trend," she advised. "Let's wait a couple days and see where we are early to mid next week."

—By CNBC's Alex Rosenberg

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