Money manager Neil Hennessy is warning savvy investors to prepare for a “severe downdraft” which could push stocks down 5 percent to 10 percent.
"What the investors are now going into is passive investing,” Hennessy, chief investment officer at Hennessy Funds, told CNBC.
“They're going into these index ETFs. And, the indexes, BlackRock and Vanguard and you name it, they all own the same companies in the same percentage. If something should scare the investor and they want to sell, everybody is going to have to sell at the same time. They're going to be selling the same stocks," he said.
"You gotta be prepared so you don't get — for lack of a better word — freaked out," he added.
Hennessy, whose firm has $6.6 billion in assets under management, is an active money manager. His funds include the Hennessy Focus Investor Fund and Hennessy Total Return Fund.
"What the public and investors now believe the concept is the lowest fees are the best thing for the best returns. And, that's so far from the truth," said Hennessy.
"So the active manager, when we have this downdraft, will be able to buy some very, very good companies at very cheap prices," said Hennessy, who predicted the pullback would last just a week or two.
Vanguard spokesperson Freddy Martino in a statement to CNBC in response to Hennessy's comments said: "We believe fears that indexing is driving the market are overblown. Indexing spans most regions and asset classes, not just large-cap U.S. equities, and accounts for 15 percent of the global equity market's capitalization and 5-10 percent of daily trading volume."
To be sure, with stocks on Wall Street nearing a milestone, it's hard to imagine such a gloomy downturn.
The Dow Jones Industrial Average hit a record high on Tuesday and approached the 22,000 mark, powered by Goldman Sachs, JPMorgan Chase and other banks.
The S&P 500 information technology index is up 22 percent year to date, leading other sectors on Wall Street.
"It's tech or bust. It's the have and have-nots," said Jake Dollarhide, chief executive officer of Longbow Asset Management, referring to the tech sector's outsized gains in recent months.
With two thirds of S&P 500 companies having reported their second-quarter earnings, 72 percent have beaten Wall Street's expectations, according to Thomson Reuters I/B/E/S. In a typical quarter, 64 percent of companies beat expectations.
Those results may reassure investors worried about high valuations. The S&P 500 is trading at about 18 times earnings estimates for the next 12 months, above its 10-year average of 14 times, according to Thomson Reuters Datastream.
(Newsmax wires services contributed to this report).
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