Four things need to occur for the stock market to break out of its downtrend, CNBC’s Jim Cramer said as stocks plunged in Monday’s trading session on worries about an expected interest rate hike from the Federal Reserve.
“Now that pretty much everything’s in bear market territory, maybe in a bear market, what’s the formula for getting out of it?” he said on “Mad Money,” adding that “this is the most treacherous market” he’s witnessed “since the financial crisis.”
The recovery has to start with the Fed, Cramer said. He reiterated that its chairman, Jerome Powell, should end the central bank’s pivotal meeting this week with a declaration that the Fed will be more data-dependent as it considers future rate hikes.
“If Powell wants to play Santa Claus to his previous Grinch-like comments, let me tell you something: if you want to see the market go higher, he’s got to do more than that,” Cramer said. “He needs to clear three hurdles.”
First, the Fed chief must acknowledge that the economy has cooled since his October remarks about interest rates being “a long way” from neutral, which suggested that he was considering hiking rates more aggressively than necessary to stifle inflation, the “Mad Money” host said.
“In other words, … we need a humble reckoning that takes the concept of overshooting off the table once and for all,” he said.
Second, “Powell needs to say that he sees cracks in the stock market and that he’s not oblivious to the stock market’s forecasting abilities,” Cramer continued, pointing to concerning action in the bond markets. Third, he should say that the drop in oil prices can counter full employment and rising wages, two inflationary trends, Cramer said.
“Let’s be clear: it’s not Powell’s job to prop up the stock market,” Cramer said. “I’m simply laying out the things he could say to turn the averages around and stop a bear market that he himself created. He may not think that’s part of his job. Fine. […] But if he doesn’t take these steps, we’ll end up having a real bad quarter and perhaps a real bad year.”
The second leg of the market’s potential recovery could come from improved market sentiment, the longtime investor argued. He said the staggering declines in shares of Johnson & Johnson after a Reuters report claiming that the company knew of asbestos in its baby powder product, while warranted, may have been an overreaction.
“This is genuine bear market behavior,” Cramer argued. “It needs to stop going down before we can get a sustained rebound in the averages.”
Also under fire is the stock of Goldman Sachs, which has been falling as the company fights criminal charges from the Malaysian government. On Monday, the company said it was lied to in an effort to push back.
“Goldman’s stock trades as if the U.S. government, too, is about to charge it with … criminal fraud. That’s not going to happen, people,” Cramer said. “There’ll be some kind of negotiated deal.”
A turnaround in the FAANG stocks — Cramer’s acronym for Facebook, Amazon, Apple, Netflix and Google parent Alphabet — could make for another leg higher, he said.
“FAANG led us down, so we need it to turn around before we can bounce,” he said, citing mixed messaging in the media about the welfare of the five leading technology companies.
Finally, any indication that the United States and China are closing in on terms for a trade deal could be the final ticket to recovery, Cramer said.
“I’m calling this [list] a tall order,” the “Mad Money” host said. “Bottom line? This is the most treacherous market since the financial crisis. You need to be nimble, you need to have cash and you need to take a long-term view when it comes to owning stocks, because long term, they remain an incredible wealth-creator. True! Short-term, though, we’re due for a bounce, we’re that oversold, … but we’re in the hands of the Fed, and if it screws up, then the Grinch will be paired with the bear to steal Christmas.”
Disclosure: Cramer’s charitable trust owns shares of Johnson & Johnson, Goldman Sachs, Facebook, Amazon, Apple and Alphabet.
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