A top investor expects volatility to dominate Wall Street for months.
Amanda Agati, PNC Financial's chief investment officer, lists stretched market valuations, Federal Reserve taper chatter and the end of stimulus checks as troubling forces.
"You have to pick and choose your exposures very, very carefully," Agati said on CNBC's "Trading Nation" on Thursday. "This is not a scenario where we think there's a rising tide that lifts all boats — certainly not at such elevated valuation levels for both equities and fixed income."
A major portion of her forecast includes an "unusual" volatility dynamic affecting both stocks and bonds right now.
According to Agati, the CBOE Volatility Index, or VIX, which is considered the market's fear gauge and reflects future volatility over a monthly time span, is back to its historical average. But she notes all contracts are still higher than January 2020, before the pandemic hit the United States.
Meanwhile, Agati is finding the bond market's equivalent of the VIX, the Merrill Lynch MOVE Index, is sitting at spring 2020's highs.
Agati warns the two trends spell bigger price swings ahead.
"We're likely to see larger than normal price swings," said Agati, who has $175 billion in assets under management.
She sees Federal Reserve policy as the biggest overall risk to the markets.
"I don't really believe that inflation is the key risk in terms of the path forward for the markets," Agati said. "We actually think it's that five-letter word that we've started to hear some Fed governors utter more recently, and that is 'taper."'
"It's a friendly reminder that the markets have been really propped up by a lot of policy accommodation and stimulus over the course of the pandemic," said Agati. "We have a fiscal cliff coming in September, and so I think that will change the game pretty meaningfully for small cap value exposures at that time."
For the most reliable gains, she's advising investors to consider going abroad. Agati finds emerging markets attractive. She continues to own and add exposure to the area.
"It's a nice hedge against an inflationary backdrop," she said. "If you zoom out and look at the longer-term growth prospects, it's the brightest star in the equity asset class universe, definitely growing — from an economic and earnings perspective — from a much higher base relative to the rest of the developed world."
Agati's volatility forecast may not include an official market correction warning, but it's something that clearly concerns her.
"When you look at historical analysis and data, we're long overdue for a meaningful correction, and last time we saw it on the S&P 500 was September of last year," Agati said.