Nobel laureate Myron Scholes said the options market indicates the smart money is getting nervous.
"Right now for the smart money, the way ahead is pessimistic," Scholes, chief investment strategist at Janus Henderson Investors, said at the annual Sohn San Francisco Investment Conference.
The ratio of the expected upside over the expected downside is at the bottom right now, making equities unattractive, according to Scholes, who uses call and put option prices to get insights into shifting near-term market risks.
"If you believe that market prices are giving us information about the road ahead ... Basically the market is saying the downside risk for the S&P 500 is about 11% and upside is only around 10% so the distribution is skewed to the downside," Scholes said. "The same thing is true if you look at all the sectors of the S&P 500 except the material sector."
Scholes won a Nobel Prize in economics in 1997 with Robert Merton for research in the pricing of options and derivatives that formed the basis for the widely used Black-Scholes pricing model.
He found that the market is increasingly buying protection against inflation, buying things such as gold and Treasury inflation-protected Securities.
"What we see is very fascinating: the market is indicating some whiff of inflation. The market tends to be worried about inflation," Scholes said. "Basically it looks like bonds and gold are strong, equities are weak."
Scholes is bullish on inflation assets such as natural gas, oil, gold, silver and agricultural commodities which have more upside than downside potential, he said.
In 1994, Scholes joined with John Meriwether to found hedge fund Long Term Capital Management, but the firm famously collapsed in 1998 after the Russian debt crisis.
The Sohn conference held in San Francisco is the West Coast version of the investment conferences that began in New York. The conferences, presented in partnership with CNBC, benefit education and other children's causes.