Rob Arnott of Research Affiliates says that the recent rally has taken away from the attractiveness of many areas of the stock market, but he remains very high on beaten-down value stocks, which he says are still priced near Armageddon levels.

“What we’re seeing is value priced as if Armageddon isn’t right next door; but it might be three or four doors away,” Arnott tells Canada’s Globe & Mail. “And the growth side is priced as if the troubles are over and it’s back to the races. That doesn’t make sense.”

Indeed, the price-to-book value of stocks in the Russell 2000 value index is now less than half the level of the Russell growth stocks, notes the Globe & Mail’s Brian Milner. Normally, the value discount is about 30%.

“The investments that make sense in this environment are deep-value stocks, which are priced for a fairly tough economic slog, and inflation-linked bonds, because they’re priced to reflect fairly low inflation expectations at a time when governments around the world are setting a trillion-dollar bonfire every few months,” says Arnott, who is also high on low-volatility assets such as cash and short-term credit, Milner reports. “Now is the time to be reining in risk,” Arnott said.

Arnott also says he thought the rally was setting the stage for solid returns over the next three to five years. “Instead,” he says, “we got at least three of those years shoehorned into [eight] months. We’ve had some wonderful returns. And those who were willing to take risk have been amply rewarded. But now you’re getting paid less for the risks than you should.”

Arnott says there are more headwinds ahead, which many seem to be overlooking. “’Phew! Glad that crisis is over. Now back to the races,'” he said in explaining the current mentality. “But the crisis isn’t over,” he adds. “We’re enjoying the eye of the storm. It still has a lot of winds and a lot of waves coming.”