CNBC’s Jim Cramer said the 1987 market crash offers important lessons that can be applied to the recent sell-off in AI stocks.
Monday marks 39 years since Black Monday. Dow Jones Industrial Average The stock plunged 22.6% in one transaction. The historic crash was fueled in part by portfolio insurance strategies designed to protect investors from losses. Instead, it triggered a wave of automated selling and stock prices plummeted.
“Rampant automatic selling destroyed stock prices even though the underlying companies were very strong,” the “Mad Money” host recalled. “Looking back, it was a great buying opportunity.”
Kramer sees that disconnect reflected in the current AI industry.
of S&P500 It fell nearly 2% last week, the biggest weekly decline since late June. Nasdaq Composite fell 4.5%, ending a four-week winning streak. Semiconductor stocks and data center stocks were particularly hard hit, with many stocks declining across the board despite no obvious deterioration in company fundamentals.
“One of the things I try to teach on this show is how far stock prices can deviate from the fundamental value of a company,” Kramer said.
Cramer suspects Friday’s decline was exacerbated by hedge fund liquidations, similar to the collapse of the highly leveraged fund Situational Awareness earlier this summer. Although no new liquidations have been confirmed, such an event could force the fund to sell shares to cover losses, causing stock prices to fall, regardless of whether the company is in distress.
“I think we’re seeing the same thing happening with all, but not all, data center stocks right now, where prices have very little to do with fundamentals,” he said. “Everything goes up all at once, even though it shouldn’t, at least not this fast. And when it goes down, it goes down all at once, and just like in 1987, nothing happens to companies.”
The lesson for investors is to distinguish between a decline in stock prices due to poor business performance and a decline in stock prices due to forces beyond a company’s control.
“On the anniversary of the crash, let’s remember that this Green Monday we may see huge moves based on the machinations of money managers who slip on skis or shatter rotations. All of this is completely off base and without a shred of consolation prize,” Cramer concluded.
He dubbed it “Green Monday” as the S&P 500 and Nasdaq recouped some of Friday’s losses on the first trading day of the week.
