Blackstone's Joseph Zidle believes stocks are in vulnerable territory.
He may not be predicting an epic correction, but the firm's chief investment strategist has reduced exposure to cope with downside risks.
"We might see multiple 5% pullbacks in 2020," he told CNBC's "Trading Nation" on Wednesday. "This is a market rally where I think we continue to get extended. And, I think sentiment as a result is getting a little excessive."
Zidle's base case calls for volatility to increase this year due to less liquidity.
"Last year's returns were some of the best on record," he said. "You had this low-vol/high-return environment fueled by a lot of liquidity. I think some of that liquidity will be at least rolling off. ... That's going to create a more volatile environment."
A 5% sell-off may not sound too scary. But if one struck the Dow now, it would lose 1,459 points.
To brace for potential trouble, Zidle decided to increase his exposure to cash late last year.
"We thought the markets were getting ahead of themselves. And, I acknowledge that we did that a little bit early, clearly," he said "We have a 15% cash weight."
Zidle has been considered one of Wall Street's biggest bulls. In the days following the historic December 2018 plunge, he told investors it was the time to buy. However, now he's telling investors the opposite because historically the market underperforms at these valuations.
"If you look at the S&P 500 going back to the 1960s, when you're investing capital at 19 times earnings, your 10-year annualized return is only about 4.3%," Zidle said. "In other words, it's telling you that valuation over the long term will be an issue if you were to deploy capital at these levels."
Zidle doesn't expect to stay cautious. He still sees stocks hitting fresh highs this year. According to Zidle, the market swings should provide entry points for investors to tactically put new money to work in stocks.
"We could see a number of smaller pullbacks in which we would look to deploy capital," Zidle said. "Generally, I think these are markets that will head higher."
His S&P 500 year-end price target of 3,500 is tied for second highest on Wall Street. It reflects a 5% increase from current levels.