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CNBC
3 days ago
- Business
- CNBC
Jim Cramer's guide to investing: The Fed isn't the only thing shaping the economy
CNBC's Jim Cramer said it sometimes seems like the Federal Reserve is "all-powerful." However, while the central bank can make conditions better or worse, it can't control everything, he continued. At the end of the day, he said, "we still have a market economy, and markets are inherently boom and bust creatures." "The action in the stock market doesn't always sync up perfectly with the real world, but various sectors come in and out of fashion based on the real-world health of the economy," he said. "You need to know how to take the economy's temperature, and looking at the unemployment rate or listening to pundits —even me — doesn't really cut it." When the economy seems to be doing well and employment data is positive, Cramer said investors should keep an eye on certain groups of stocks that can signal a slowdown. Some sectors are more economically sensitive than others, he said, or they are more likely to see losses early on in a downturn. If stocks related to housing and automobiles start to perform poorly, it might be a sign that the economy is about to peak — or at least investors are betting on a peak — Cramer said. Economic growth can cause long-term rates to rise, he continued, which makes it more expensive for consumers to take out housing or car loans. Commodity companies, such as those that make paper or chemicals, may also get hit at the start of an economic downturn, Cramer said. Paper companies can be a good barometer of global commerce, he continued, as less paper means less packaging. Plastic is ubiquitous, Cramer added, so it's "a real good tell." According to him, copper is also economically sensitive and connected to the global economy. "So, watch the homebuilders, watch the automakers, watch the paper stocks, and particularly, watch the price of copper," he said. "That way, you won't feel clueless the next time something goes wrong, and you'll have a much better idea of what to do with your stocks." Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest
CNBC
3 days ago
- Business
- CNBC
Jim Cramer's guide to investing: Looking back at how the Fed handles economic downturns
CNBC's Jim Cramer reviewed several significant market downturns he's witnessed throughout his career and looked at the Federal Reserve's action during those moments. "Whenever the market goes into a tailspin, whether it's a Fed-mandated decline or if it's caused by the White House, or by the real weakness in the economy, you should try to understand why it's happening," he said. "Because that has a huge impact on what happens next, and it's often the key to saving, or losing, a ton of money." During his more than 40 years on Wall Street, Cramer said he's recommended "selling everything" four times. Once in 1987 just before historic "Black Monday" and "Terrible Tuesday" declines, then in 1998 when hedge fund Long-Term Capital Management was in crisis. He also advised investors pull out of the market in 2000 before the dotcom bubble burst, and then in 2008 as the collapse of the U.S. housing market triggered a devastating crash. Of these moments, Cramer said he only regrets his judgement in 1998. At the time, Cramer's own hedge fund was underperforming and investors were pulling money out, he said, adding that he sensed "a total collapse." Cramer said he believed the Fed seemed "oblivious to the situation" even as the spillover from Long-Term Capital Management's predicament threatened other banks. But shortly after Cramer recommended pulling out the market, the Fed stepped in. The central bank issued an emergency rate cut and helped bail out Long-Term Capital Management, staving off disaster. His call at the time was "perhaps the worst professional mistake of my life," Cramer conceded. He said he learned an important lesson — even if the Fed seems to be "asleep at the wheel," it can still change course at any moment, especially when the market is doing poorly. However, the Fed acted too late in 2008, Cramer said. While he said the downturn stemmed from the economy itself, the Fed made it worse with rate hikes. The agency believed the economy was strong, he continued, and it "couldn't see the rot underneath." Cramer said some major firms had already collapsed by the time the Fed started to cut and offered up "the mother of all government bailouts." "When I told people to get into cash in October of 2008, when the Dow was around 10,200, I got a lot of hate — the conventional wisdom was that I was being insanely irresponsible," he said. "Of course, if you listened to me, you sidestepped a hideous decline. The financial crisis was caused by genuine systemic risk, even if the very real problems were made worse by a clueless Federal Reserve." Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest
CNBC
3 days ago
- Business
- CNBC
Jim Cramer's guide to investing: Why the Fed matters
CNBC's Jim Cramer told investors that Wall Street is always looking for signals — especially from the Federal Reserve. While he said market action isn't always dictated by the Fed, stocks can be highly-reactive to the central bank when the economy is at an inflection point. "When the Federal Reserve matters — when it's tightening too aggressively or when it's easing, it's about to start easing — well then it really, really matters," he said. While the Fed can weaken the economy by raising interest rates, Cramer emphasized that it can also spur economic growth by cutting them. When the economy cools down, he said, the Fed will often stop hiking up rates and then start to bring them down. Cheaper overnight borrowing for banks mean that consumers and businesses have less incentive to save money and more incentive to spend or invest, Cramer said. Increased consumer spending and business growth create a "virtuous circle," Cramer said, as expanding companies hire and pay more employees who then go on to spend more money. Once the Fed stats to cut, Wall Street hedge funds tend to follow the same "playbook," Cramer said. They sell recession-proof stocks like utilities and consumer staples, and they buy cyclical stocks, or ones that do well as the economy flourishes. However, he advised investors to be careful and keep a diversified portfolio during these economic rotations. He added that it's also wise to be cautious when trying to pick up stocks that have gone out of favor. Some hedge funds, he said, "don't want to fight the Fed in either direction" and won't stop selling an out-of-favor group because it's become too cheap. According to Cramer, it's worthwhile to remember that Fed-induced economic changes can be reversed. However, he also said it can be difficult to discern when the Fed will change course, adding that central bank leaders can approach the job differently. "Any problem that's man-made can be unmade," he said. "And you need to factor this into your calculus or you'll miss out on some really major moves." Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest
CNBC
3 days ago
- Business
- CNBC
Jim Cramer's guide to investing: Wall Street moves before the Fed does
The stock market is all about anticipation, CNBC's Jim Cramer said. Investors don't wait for the Federal Reserve to actually raise or lower interest rates, he said. Instead, he continued, they act as soon as the Fed indicates action might be coming. "The key here is that nobody's waiting around patiently to see how everything pans out," he said. "If the Fed chief says we're raising rates three times next year, traders don't sell next year, they sell right now. If the Fed chief walks back that decision, well, the traders will turn around and buy those same stocks hand over fist." The Fed's "pronouncements affect the trajectory of the economy," Cramer said. The market reacts quickly to these changes, he continued, and they have the capacity to crush the averages or send them soaring. He said stocks tend to reflect Wall Street's visions of the future, not the present. For example, Cramer said, the economy seemed to be thriving in 2021 after the Fed made a slew of rate cuts during the pandemic. But in November, the Fed warned that inflation was becoming an issue and indicated it would hike up rates, Cramer said. High-flying growth stocks immediately started to plummet, he said, and the market saw losses even though the Fed first increased rates in March. Similarly, Cramer said that 2024 was a great year for stocks because investors believed the Fed would start cutting rates — even though it only made its first cut in September. As long as Wall Street can see the potential for rate cuts, it's likely there will be "a fabulous bull market," he said. Cramer stressed that the anticipatory nature of the market extends beyond the Fed. He said Wall Street reacts when the White House indicates there could be higher tariffs coming or new economic data is released that changes perceptions of the future. "Everyone in this business is constantly looking at the data to piece together their own worldview — a view of how things will look in the near to medium term future," Cramer said. "When the Fed or the president or some foreign actor does something that dramatically alters Wall Street's worldview for the worse, it can slay a bull market in the blink of an eye, leading to some frightening declines, which is why I'm trying to prepare you for any business cycle." Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest
CNBC
3 days ago
- Business
- CNBC
Jim Cramer's guide to investing: What does the Federal Reserve do?
It's important for investors to understand how the Federal Reserve operates and why it can drive market action, CNBC's Jim Cramer said. "We fear the Fed because the Fed sets interest rates, and if they get it wrong, they can allow inflation to run unchecked or do some real damage to the economy and to you," he said. "We adore the Fed because when they get it right, the results can be very, very good for the stock market." The Fed is the U.S.'s central bank, tasked with regulating monetary policy and setting the federal funds rate, which is the short-term interest rate banks can use to borrow from each other overnight. The Fed is charged with keeping inflation in check without sending the economy into a recession, encouraging employment while keeping prices stable. It is considered an independent agency, as board members are appointed to serve terms, not elected. This independence relieves reelection pressure that might discourage Fed members from being "ruthless enough" if it's necessary to make unpopular policy decisions that bring the market down, Cramer said. When the economy seems to be slowing down, the Fed cuts interest rates to stimulate business action. Rate cuts, he said, make it easier to own stocks and can send the market soaring. But when inflation heats up, the Fed raises rates, sometimes aggressively. While rate hikes hinder inflation, they also hurt the economy. Banks pass on increased borrowing fees to customers, which makes businesses more cautious and less apt to expand or hire new employees. Cramer said there have been Fed-induced recessions followed by Fed-induced recoveries. Even though part of the Fed's job is to promote employment, Cramer said it must sometimes encourage layoffs to quell fiery inflation. Inflation "destroys a lot of wealth, and high prices make life miserable for everyone," Cramer said, adding that it can be "very difficult to stamp out." Wage inflation is the most dangerous kind of inflation to the Fed, he continued. When businesses feel they must raise wages to keep employees, they raise their prices to compensate, Cramer continued. As workers have more money to spend, demand increases, so prices continue to rise, and "suddenly there's inflation everywhere," Cramer said. He added that higher wages then become meaningless to consumers because everything is so expensive. "When you see inflation, that should scare you," Cramer said. "Because that means the Fed will raise interest rates to stamp it out. They're going to do their job, even if it means sending the economy into a tailspin." Click here to download Jim Cramer's Guide to Investing at no cost to help you build long-term wealth and invest
