When investors experience hard days on the stock market, they need a plan on how to react, Jim Cramer told his Mad Money viewers on Friday. That means knowing what kind of sell-off you're dealing with and how to navigate best. Fortunately, history can be your guide when it comes to recognizing these inevitable moments of weakness and saving you from panic.
On Wall Street on Friday, the Dow Jones Industrial Average fell 298 points or 1.2% to 24,686. At its low, the index fell by 539 points. The S & P slipped 1.74% and the Nasdaq 2.06%.
Cramer told his viewers that the US stock markets since his IPO in 1979 have only experienced two truly heinous sell-offs rolling crash of the financial crisis from 2007 to 2009. But while both these losses saw large losses, they were actually very different.
Many investors do not remember Black Monday, where the Dow Jones Industrial Average lost 22% a single day. Even less remember that the market lost 1
The carnage was not stopped until the Federal Reserve entered with pledges of additional liquidity. But in the end the economy was strong. There was nothing wrong with the underlying companies, the market simply stopped working. For that reason, it only took 16 months to recover to the level before the crash.
Investors experienced similar mechanical meltdowns during the so-called "Flash Crash" of 2010 and their twin in 2015. At 6:32 am on May 6, 2010 In the East, the futures markets again overcame the markets, except that this time around the machines handled most of the trade. The crash lasted a total of 36 minutes. During this time, the Dow crashed 1,000 points from nearly 10,000 points.
In August 2015, there was again a flash crash at the Open, the Dow at the same time again lost 1,000 points of an eye. In the confusion, traders could not tell which prices were real and what pure fantasy was. Only those with strong stomachs risked trading at the heart of the decline, but these traders were well rewarded.
In all these cases, Cramer said, the machinery of the markets was broken. Even the circuit-breakers put into service after 1987 failed to contain the declines and in fact did little to slow them down. But for those investors who could see what actually happened, those declines were a once-in-a-lifetime gift (good, twice).
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The Great Recession
The Great Recession was a completely different animal. The market began to fall in October 2007, but did not reach its low point until March 2009 nearly two years later. It then lasted until March 2013, four years later, until the markets were balanced again. Cramer said this type of decline is the most dangerous, but luckily it's really a one-time event that happens only every 80 years or so.
The Great Recession was caused by a 17-fold increase in interest rates by the Fed in the lock-step, trying to cool an already-cooling economy. The recession could have been avoided if the Fed had done its homework and actually talked to CEOs, like Cramer did back then.
Cramer recalled discussions with the CEOs of banks, all of whom told him that mortgage defaults were on the rise, in a sense none of them had ever seen before. Cramer's famous "you know nothing" rant on CNBC came from these talks when the Fed did nothing until the first banks collapsed. The market fell 40% before he finally gained a foothold.
How can investors recognize this devastating decline? Cramer said investors might wonder if the economy is sound. Is the business going back? Is the employment falling? Are interest rates still rising when cracks occur? If large companies can not pay their bills, the problem could be much deeper than you think.
Today's market is not like 2007, Cramer said. Business is stronger, our banking system is stronger and there is still time for the Fed to take its foot off the brakes and wait for more data before continuing.
So you have just discovered a mechanical breakdown in the market Buy? Cramer said he has always been a fan of high-yield, high-yield, companies whose dividend yield is rising as their share prices fall with the broader averages.
He said that these stocks are always among the first, as their dividends help protect you. He always advised buying in large scales as the market declines. This way, if the recovery is fast, you will still make a little money, but if it's a bigger, multi-day sell-off, you'll do more.
Cramer reminded viewers that the Fed is lowering interest rates. Almost every market dip is a buying opportunity. But when interest rates rise, it becomes difficult. However, not every interest rate hike causes a crash, but only those that drive interest rates high enough to break the economy.
During these times it is important to remember that stocks are not the only asset class. You can also invest in gold, bonds or real estate to stay diversified.
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Not just the Fed
The Fed is not the only reason why the market is declining, and Cramer ended the show with a list of other evildoers.
The first sell-off offenders are margin calls. Too often, money managers borrow more money than they can afford, and when their bets go south, they are forced to sell positions to raise money. We saw this in early 2018 as traders competed against market volatility by shorting the VIX. As volatility returned, these traders lost a fortune and the entire market suffered.
There are also international reasons for the sell-off of the market, including crises in Greece, Cyprus, Turkey and Mexico. Cramer said in these cases, it's important to ask if your portfolio will actually be affected by these events. Usually the answer is no.
Then there is the IPO market. Stocks play by the laws of supply and demand, and when many new IPOs hit the market, asset managers often have to sell something to buy. Declines may also stem from multiple income shortages as well as, yes, political rhetoric from Washington.
Cramer said many of these declines happen over several days. The key is to see if the sale ends at 14:45. East. If so, can safely buy. But if not, it will probably sell more the next day and it will be worthwhile to be patient.
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