North American equity markets have mostly been in cruise control mode since the world emerged from the depths of the great recession, but at least one Bay Street money manager thinks a reckoning could be around the corner.

In an interview on BNN, First Avenue Investment Counsel Chief Executive Officer and Chief Investment Officer Kash Pashootan said a confluence of factors could drive stocks down as much as 20 per cent in 2018.

“I think investors are in for a shock in the next market pullback because of a few factors coming together,” he said Tuesday. “We’ve had eight, nine years of low volatility, very low volatility -- almost volatility that is bond-like volatility.”

Pashootan said there’s also a demographic angle at play in his thesis, as risk-averse Baby Boomers approaching the end of their working years may get out of the market at the first signs of turbulence in order to preserve their retirement savings.

“When we do get that first pullback, number one, I think investors are not used to it, they’ve had very little volatility; and, two, they’re either close to retirement or retired. So you put these two factors together and the product of that is a panic factor that can be quite high and an exodus from equities,” he said.

While volatility, as tracked by the CBOE Volatility Index (or VIX), has ticked modestly higher in recent weeks, it remains just off historic lows amid the continued surge of North American equity indices. Not a single major index in Canada or the United States have suffered a 10 per cent or greater drop since early 2016.

Pashootan said investors should embrace volatility, rather than run from it, as it presents buying opportunities which can fuel outsized gains.

“Investors have forgotten that volatility is part of the journey to achieve a six, seven, eight, nine per cent rate of return,” he said. “If there isn’t any volatility then you’re in the two to three per cent range.”

“Investors are not used to seeing markets correct five per cent, six, seven per cent in a quarter or on a six-month basis. It’s not a matter of if, it’s a matter of when.”