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Rob Arnott may be on to something, or maybe just on something. But don't blame him for bad news.

A respected money manager and newly-named editor of the Financial Analyst Journal, Arnott sees trouble on the horizon for financial markets. He has four reasons to believe that the stock market is in the midst of a perfect storm:

• Valuations
  
• Equity risk premiums
  
• Quality of earnings
  
• Demographics.
  

Let's start with valuations -- they remain too high viewed in the light of cumulative stock dividends. Even with a 5 percent dividend growth, it would take 40 years for before cumulative stock dividends match the cumulative income received by investors in ordinary treasury securities.

Now think about the risk. Stocks generally have a built-in risk premium because over time, they are more volatile than bonds. Stocks should be priced to offer a higher return relative to corporate and U.S. Treasury bonds, but it should seldom exceed 5 percent.

Yet what about those periods when the real total returns on stocks were negative? They are all lumped together in studies that go back to 1929, the year of the great stock market crash; in effect, we're basing that 5 percent risk premium on a higher than average starting point for risk premiums. Investors who incorporate that worst-case scenario and load up on stocks will be sorely disappointed over the next 15 years.

The quality of earnings is still an issue, despite all the house cleaning and legislation. The S&P has moved to reporting "core earnings," but few are paying attention. Many are still basing their numbers on EBITDA, earnings before interest, taxes, depreciation and amortization. This assumes that expenses such as interest and taxes don't matter, and that a company isn't going to replace fixed or intangible assets. As Arnott says, EBITDA is an unrealistic assumption. And while there have been some strides made in addressing the problems with earnings, we still have a long way to go.

Finally, consider demographics. Much like Japan, this country is aging, and in the next 10 to 20 years, there will be more retirees than ever. They'll have to sell assets to fund their retirement, and sell them to fewer buyers (workers). It's a classic supply/demand imbalance that will lead to lower asset prices. At the same time, more and more retirees will be buying goods and services, putting upward pressure on those prices and squeezing the assets of those retirees.

Baby boomers will sell their homes first. We've already seen the effects of empty nesters downsizing, and while this may not be a real estate bubble ready to burst, we won't see the double-digit price appreciation that many areas of the country experienced.

Stocks will be sold next, while boomers hold on to fixed income assets such as Treasuries for as long as possible, because they represent guaranteed income. And the last asset to go will be inflation-protected treasuries, or TIPs, which are designed to protect to your principal; if you're 70 years old with maybe 15 to 20 years left, the rate of return is of little or no consequence as long as your assets are intact.

Arnott said that after considering the pressure facing financial markets, he became morose. Under his perfect storm scenario, he will have to push back his retirement date, save more than the Joneses next door and be willing to live a little lower on the standard of living ladder. Or he can risk being sorely disappointed in his twilight years.

But it's not all gloom and doom. There is a huge basket of assets, from best to worst. The key is to buy what's out of favor. Right now, stocks and bonds are mainstream.

Arnott urges people to think about other investments. Take a look at commercial real estate -- real estate investment trusts, or REITS, are looking quite attractive, as some of our roundtable guests have suggested in recent months. He's also high on TIPs, as inflation will pick up and people will be interested in protecting their purchasing power. Commodities are worth investigating as an alternative investment, especially if inflation picks up. And there's emerging market debt, currently returning about 10 percent with a very low default rate. And lastly, high-yield corporate bonds, also known as junk bonds. These bonds could become quite attractive, especially if we slip back into a recession, as returns will rise along with fear of default.

For those still set on buying stocks, Arnott cautions against companies that don't pay out dividends. Yes there's that pesky double taxation issue, but his studies have shown that those companies that retain earnings usually fritter away those monies on frivolous projects. Those that retain fewer earnings spend those earnings on top priority projects.

Stock buyback programs avoid the double taxation problem, but aren't as reliable as dividends. Companies may announce large stock buyback programs, but may not buy back the entire amount announced, and usually occur when management redeems stock options. This is not beneficial to external shareholders.

Rob Arnott will appear on the Friday, Nov. 15 broadcast of Wall $treet Week with FORTUNE.