CNBC’s Jim Cramer explained to investors Thursday how to weather a potential cycle of rising interest rates.
The Federal Reserve on Wednesday raised its benchmark interest rate by a quarter of a percentage point to a range of 4% from 3.75%, the first increase in three years. “Inflation is too high and has been there for too long,” Fed Chairman Kevin Warsh said at a post-meeting news conference, adding that Wednesday’s rate hike would help push the central bank back to its 2% inflation target sooner.
Cramer said investors are concerned that Wednesday’s action could signal the beginning of a broader tightening cycle that has historically put short-term pressure on stock prices.
“If history is any guide, these rate hikes are likely to continue for some time,” Cramer said. “Remember, anything that helps beat inflation tends to be bad news for the stock market in the short term, but good news in the long term.”
Cramer cited a memo from Jim Reid, head of macro research at Deutsche Bank, saying the past 14 rate hike cycles had an average of 22 months and a median of 15 months. But recessions usually take longer to arrive, taking an average of 42 months from the first uptick to the next, and sometimes never materializing.
That means investors shouldn’t necessarily take the first rate hike as a signal to abandon stocks. Rather, history shows the importance of being more selective and being prepared for changes in market leadership as the cycle progresses, Kramer said.
During the last tightening cycle, which began in March 2022, defensive sectors such as utilities, consumer staples, and healthcare held up relatively well during the first six months, while the technology sector performed the worst.
But that leadership eventually flipped. Throughout the hiking cycle through July 2023, technology has moved from one of the most backward areas to one of the most powerful as the Magnificent Seven takes off.
“Even if you want to avoid tech stocks once the rate hike cycle starts, it’s best not to be bearish on this sector for too long because it tends to rebound,” Cramer said.
We see something similar in the 2015-2018 tightening cycle. After the Fed’s first rate hike in December 2015, utilities, consumer staples, and real estate initially outperformed, but technology ultimately led throughout the cycle through December 2018.
Kramer cautioned that every cycle is different. This time, triple-digit oil prices caused by wars in the Middle East are increasing inflationary pressures. Lower oil prices could ease that pressure and reduce the need for further rate hikes.
The takeaway for investors is to remain cautious and not assume the broader market will suffer as long as the Fed continues to raise interest rates.
“Buying stocks when the Fed is tightening means you’re trying to fight the Fed, and unless you’re selective about what you own, that’s usually a good way to lose money,” Cramer said.
