“Don’t panic and sell”
“This is not a good time,” Cramer said on “Squawk Box,” referring to the sharp sell-off in stocks and bonds on Tuesday, which was sparked by Federal Reserve Chairman Jerome Powell’s comments on inflation.
However, the host of “Mad Money” added, “Don’t panic and sell.”
Powell warned lawmakers in remarks prepared for Tuesday’s Senate Banking Committee hearing that the causes of the recent rise in inflation may last longer than expected. The central bank chief, who has previously stated that higher inflation is only temporary, has now stated that economic growth has “continued to strengthen,” but has been met with upward price pressures due to supply chain bottlenecks and other factors.
Powell was not saying anything encouraging for stock investors during a seasonally weak period in September and early October, according to Cramer. Powell’s remarks on the Senate floor on Tuesday are part of the required testimony he must give to Congress about the Fed’s economic response to the pandemic. On Thursday, he will testify before the House Financial Services Committee.
The Nasdaq Composite fell more than 2% on Tuesday as a sell-off in technology stocks accelerated. The Dow Jones fell more than 1%. The 10-year Treasury yield has risen to 1.56 percent, returning to levels not seen since June, as a result of rising economic optimism and inflation fears. Higher bond yields, which move in the opposite direction of prices, can put pressure on technology stocks by exposing their exorbitant valuations.
Cramer advises investors to hold off on purchasing technology during the current downturn.
Cramer advised investors to avoid investing in technology for the time being. “You must wait. It’s the last day of the month. Whoever is attempting to sell these stocks is not done.”
Investors must ultimately decide whether to trade Big Tech or buy and hold quality names.
“Alphabet wasn’t having a good time for a while. And then it was reborn. Netflix wasn’t great at first, but then it became so. “Good example, Microsoft,” he said. “You miss the moves if you flit in and out of these.”
Alphabet, parent company of Google, and Microsoft, in particular, were under pressure in Tuesday’s technology-driven sell-off. However, they have increased by 55% and 28%, respectively, this year.
Cramer believes that ‘almost anything’ in the energy sector is a buy.
Energy stocks, on the other hand, rose as U.S. oil prices rose as much as 1% to around $76 per barrel, a nearly three-year high. Oil prices in the United States, as measured by West Texas Intermediate crude, have risen more than 75 percent this year as Covid-disrupted business activity has resumed.
Cramer believes there is still time to buy energy stocks. even at these lofty heights “I still believe you can get them,” he said. “I believe you can buy almost anything in this group.”
Exxon and Chevron, which were both up on Tuesday, have risen 46 percent and 23 percent, respectively, in 2021.
High bond yields
The 10-year Treasury yield rose to as high as 1.567 percent on Tuesday, as investors bet the Federal Reserve will soon end its pandemic-era bond-buying programs. The Nasdaq Composite dropped more than 2% on Tuesday, as technology stocks bore the brunt of the sell-off.
Tech stocks are generally considered long-duration stocks, which means they trade on the promise of significant earnings growth in the future. When interest rates rise, those future potential cash flows become less valuable, undermining the valuation of technology stocks.
Meanwhile, so-called short-duration stocks that deliver consistent earnings today are less affected by where rates will be in the future.
“The longest duration stocks should underperform if rates rise,” said David Kostin, Goldman’s head of U.S. equity strategy, in a note. “We expect short-term stocks to outperform tactically if interest rates rise.”
According to Goldman, the stock market has become particularly sensitive to rising rate shocks due to Big Tech’s growing dominance in the Dow Jones. According to the bank, the information technology and communication services sectors now account for 40% of the Dow Jones market cap, and the five largest stocks — Facebook, Amazon, Apple, Microsoft, and Alphabet — account for 23% of the index market cap.
“The sensitivity of equity returns to changes in real rates has turned increasingly negative since late 2018, in part due to the growing weight of high-growth, long-duration companies in the Dow Jones,” Kostin said. “The performance of long-term stocks has closely tracked the path of interest rates.”
Long-term stocks to avoid in the near term, according to Goldman, include Plug Power, Sunrun, Uber, Lyft, and Carvana. According to Goldman, among the 11 Dow Jones sectors, technology has the longest equity duration.
Stocks in Goldman’s short-duration basket should outperform if the 10-year Treasury yield rises to its forecast of 1.6 percent by year’s end.
Premier, EQT, Air Lease, and eBay are examples of short-term stocks. Energy stocks, on average, have the shortest duration, according to Goldman.
“The pair trade is theoretically and empirically linked to the Growth vs. Value trade because high growth stocks have long implied equity duration and tend to underperform when rates rise,” Kostin explained.
The Dow is in a bubble
Famous investor Jeremy Grantham is increasing his bet on the stock market bubble.
Grantham Mayo van Otterloo co-founder and chief investment strategist Jeremy Grantham
The Years Project | SHOWTIME is the source of this information.
Jeremy Grantham, a well-known investor, is doubling down on his bubble prediction, claiming that current stock market conditions are even crazier than previous speculative periods preceding the 1929 and 2000 crashes.
“Equities is a magnificent bubble in the United States,” Grantham, co-founder of GMO, told Wilfred Frost on Tuesday in an interview that aired on “Closing Bell.” “This has been crazier by a significant margin than 1929 and 2000, in my opinion,” Grantham added. We’ve met all of the requirements. So anytime now you can go. And the end of a bubble is like killing off a vampire.”
Grantham is a well-known investor and market historian who has a track record of correctly predicting market bubbles. He predicted the 2008 market crash and the dot-com bubble burst in 2000.
According to the investor, bubbles typically last three years up and three years down, for a total of six years. The stock market has pulled off a rapid rebound from the pandemic shock with the Dow Jones coming all the way back from its March 2020 bottom in the span of several months. The broad equity benchmark is up about 16% year to date, but it is still about 4% below its all-time high set in early September.
Stocks suffered a steep sell-off Tuesday, with the tech-heavy Nasdaq Composite shedding 2.8 percent for its worst day since March. Soaring Treasury yields prompted investors to sell high-flying technology stocks, while the budget stalemate in Washington also weighed on sentiment. The Dow Jones lost 2 percent , while the blue-chip Dow Jones Industrial Average dropped nearly 570 points.
The forward price-to-earnings ratio of the Dow Jones, a widely used valuation metric on Wall Street, is currently around 22. That’s near the highest level since the early 2000s, according to FactSet.
“You’d have the 1929 bubble, the year 2000, and today. That would be perfect, three times squeezed into a century,” Grantham said. “They have the feel of bubbles. And they usually last about six years, measured from when they leave the trend to when they return to it.”
Grantham cited everything from meme stock mania to SPACs and cryptocurrencies as signs of a market bubble.
“Meme stocks are a disgrace to serious investing. “We’ve never seen anything like it,” Grantham said. “They were in the hundreds of millions, not the tens of billions that the crazy SPACs are this time. Not to mention the world’s bitcoins, which are worth a couple of trillion dollars, all based on the belief that other people will pay for what you have.”
Cathie Wood’s strategy during sell-off
During Tuesday’s sell-off, the closely followed innovation investor purchased shares of 15 stocks. Wood, on the other hand, sold 269,552 Tesla shares, a position worth approximately $209 million, while the company’s stock dropped 1.7 percent.
Bond yields have risen this week, putting pressure on the market’s growth sectors. On Tuesday, the 10-year Treasury yield climbed as high as 1.558 percent, and the 30-year Treasury yield surpassed 2 percent, causing the technology-focused Nasdaq to have its worst day since March. Tech stocks typically trade on the promise of significant earnings growth in the future. When interest rates rise, those future potential cash flows become less valuable.
Wood’s flagship ETF, ARK Innovation, fell 4.2 percent on Tuesday, bringing its year-to-date losses to nearly 10%.
This is an unusual move for Wood because she usually trims her biggest positions when they are going up, not down.
Wood was busy buying her highest conviction names during the sell-off.
ARK Innovation purchased 164,151 shares of Square, a position worth approximately $40 million, as the payments giant fell 6% on Tuesday. Wood purchased 95,295 shares of Roku, a streaming company, after the stock fell 3.3 percent. This transaction cost approximately $29.6 million.
UiPath fell 3.9 percent, prompting Wood to buy 337,091 shares worth approximately $17.6 million.
The quick-thinking investor also bought the drop in Zillow and DraftKings, both of which fell 2.8 percent. ARK Innovation paid $22.8 million for 258,827 shares of Zillow and $19.6 million for 393,050 shares of DraftKings.
ARK Innovation purchased 184,199 shares of cryptocurrency exchange Coinbase after its stock fell 1%. Based on Tuesday’s closing price, this position is worth approximately $42 million.
Robinhood, Zoom Video Communications, Exact Sciences, Signify Health, Ginkgo Bioworks, Crispr Therapeutics, and Veracyte were also purchased by the innovation fund.