David Darst, senior advisor at Morgan Stanley Wealth Management, likes lists, and he shared his bear market checklist Wednesday on CNBC a day after the Dow Jones Industrial Average dropped 272 points.
On "Squawk Box," he said three of his six indicators of a bear market—a drop of 20 percent from record highs—are flashing a red light.
"So that's why the market is trying to come to terms with this," he continued, but concluded that he believes stocks have more room to run higher after a short pause. That puts him in line with many market watchers on Wall Street.
Here is Darst's bear market checklist:
- Is the Federal Reserve tightening now? No. Economists expect the start of Fed interest rate hikes next summer.
- Recession looming? He said, No (though he did acknowledge the IMF's downgrade of global growth forecast for this year and next).
- Are investors too euphoric? No, according to the American Association of Individual Investors (AAII). The group's latest report showed optimism fell to its lowest level since early August.
- Are long-term stock valuations stretched? Yes, said Darst (though he said valuations are not that stretched in the near term).
- Are banks, small caps and transportation stocks taking heat? Yes. The small-cap Russell 2000, for example, entered correction territory again Tuesday.
- Are bond yield spreads are widening? Yes, he said.
Darst counts 719 trading days since a stock market correction—a drop of 10 percent from record highs. "It can still run further," he said. "The market is [just] basically taking a flu shot."
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