Yahoo Finance Jim Cramer says he'd use any looming sell-off to get into stocks and he thinks the 'set up' remains very good — but here are 3 big risks he's overlooking
Jim Cramer isn’t nervous about the stock market’s recent rally. In fact, the TV host expects any near-term sell-offs to create good opportunities for investors.
“The pattern’s simple: emotional horror show followed by rational buying, which remains a very good setup indeed,” he said on a recent episode of his CNBC show Mad Money.
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Cramer believes the Federal Reserve’s rhetoric is overblown and that high-quality stocks remain fairly valued. For his own part, he was focused on earnings reports from Raytheon, FedEx, CarMax, MongoDB and Darden.
However, certain signs point to misplaced confidence. (And let’s not forget, Cramer made perhaps the worst stock call in history when he proclaimed — just as confidently — that Bear Stearns was a safe investment just before the company imploded.)
Here are the top three potential risks “Cramerica” could be missing.
Americans are running out of cash
“There’s still plenty of money on the sidelines that might come into the stock market,” Cramer said on the show.
However, he might have missed a recent analysis from JP Morgan that suggests household excess savings from the pandemic era could run out by October this year.
Meanwhile, the Federal Reserve (and other central banks) may be considering a drain of cash out of the banking system. These institutions have flooded the system with excess cash over the past decade. They now need to pull cash out to deal with inflation.
That could drag the market lower in the months ahead, or at least hinder a strong rally in stocks.
Read more: Worried about the economy? Here are the best shock-proof assets for your portfolio. (They’re all outside of the stock market.)
Inflation is still sticky
Like an annoying guest that has overstayed its welcome, inflation simply doesn’t want to leave. The core consumer price index was up 3.0% year-over-year in June — significantly down from a 40-year high of 9.1% in June 2022. But it's taken 11 rate hikes, with a handful of supersized 75-basis-point increases to get there.
That said, the core CPI is a key measure of the economy because these items aren’t as volatile as food or energy and should be much slower to react to changes in interest rates or consumer sentiment. The core rate remains far higher than the Fed’s 2% target, which means the central bank could be compelled to keep rates more elevated than previously expected. Fed Chair Jerome Powell has signaled that more rate hikes are likely on the way.
That’s not good for stocks. If investors can extract 4.75% from a U.S. bond, why would a stock be appealing? By comparison, the average S&P 500 stock offers a 1.5% dividend yield and a 4% earnings yield. Bear in mind that stocks carry significantly more risk than a government bond, so you effectively get paid less to take on more risk.
Commercial real estate is still concerning
Higher interest rates also make leveraged real estate less appealing. Commercial landlords who own office buildings and malls worldwide worry about the looming recession and the work-from-home trend. They also owe $1.5 trillion in commercial debt expected to come due over the next three years. If interest rates remain high during that period, commercial landlords will have to refinance their debt at higher rates while — you guessed it — their net income is lower.
It’s an issue that could spill into other parts of the economy.
Given Jim Cramer’s mixed record as a stock picker, it remains to be seen these next few months whether Cramerica should treat him as a pundit to celebrate, or just another loud celebrity.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
