The everybody-wants-to-buy-stocks trade keeps propelling Wall Street to record high after record high, but that cannot last forever, economist Mohamed El-Erian warned Friday.
"We are living in this wonderful world of liquidity," the Allianz chief economic advisor said on CNBC's "Squawk Box." "But be careful. There is an end at some stage. It's just very difficult to say when."
Trying to determine when that readily available pool of buyers and sellers in the market might dry up presents investors with two critical challenges, El-Erian added.
The first, he said, is "reconciling short-term favorable momentum with mounting medium-term uncertainties." The second is investors adjusting their portfolios to include some risk mitigation that is still valued attractively.
That's easier said than done, however, because "there are very few risk mitigation strategies that are valued attractively right now for the retail investor," he contended. "That's an issue for the long term."
The liquidity in the stock market can be traced to consistently low bond yields and a Federal Reserve that's been keeping policy interest rates at historic lows since the 2008 financial crisis.
The yield on the benchmark 10-year Treasury fell below 1.7% on Friday for the first time since October. The 30-year bond yield was around 2.16%.
Low bond yields, which move inversely to prices, makes equities more attractive.
The S&P 500 was up about 3% year to date as of Thursday's close, following a 2019 that saw the index post an almost 29% advance for its best annual performance since 2013.
"I think that you should be increasingly more defensively oriented while keeping a claim on the upside," El-Erian said.
Most people, though, are instead employing an investment strategy focused on reducing quality in pursuit of higher short-term returns, he said. "That is why I think later in the year we may have a lot more financial instability."
"At some point we're going to have to pivot," El-Erian said. "But investors right now are just happy focusing on the short term, and the short term has rewarded them in virtually every asset class."