Mad Money w/ Jim Cramer – Episode Summary (12/27/24)

Introduction

In the December 27, 2024 episode of CNBC's Mad Money with Jim Cramer, host Jim Cramer delves deep into the mechanics of stock market sell-offs, drawing lessons from historical crashes to equip investors with strategies for navigating turbulent times. The episode is structured around an in-depth analysis of past market downturns, practical investment advice, and an interactive Q&A segment with listeners.

Historical Market Crashes: Black Monday (1987) and the Financial Crisis (2007-2009)

Cramer begins by recounting two of the most significant market crashes he has witnessed: the one-day crash of 1987 and the prolonged financial crisis of 2007-2009.

• Black Monday (1987): On October 19, 1987, the Dow Jones Industrial Average plummeted over 22% in a single day. Cramer shares his personal experience, noting, “Black Monday hit fast and hit hard. It felt there were no buyers to be found” (04:15). He explains the role of portfolio insurance and the misuse of futures trading by investment firms, which exacerbated the market decline. The intervention by Fed Chairman Alan Greenspan, promising liquidity to stabilize the market, led to a swift recovery, though it took until mid-1989 for the Dow to return to pre-crash levels.

• The Financial Crisis (2007-2009): Contrasting the abruptness of Black Monday, the financial crisis was a prolonged bear market that lasted six years. Cramer emphasizes the systemic risk involved, stating, “The financial crisis gave us a once in a lifetime bear market with true systemic risk” (21:16). He criticizes the Federal Reserve’s delayed response and highlights the catastrophic impact on investors who lost faith in the stock market.

Flash Crashes: 2010 and 2015

Cramer proceeds to compare Black Monday and the financial crisis with the flash crashes of 2010 and 2015, highlighting their mechanical nature and the role of high-frequency trading.

• 2010 Flash Crash: Occurring on May 6, 2010, the Dow fell nearly 1,000 points within 36 minutes due to a large erroneous sell order and the overwhelming impact of futures trading (10:00). Cramer refers to it as a “phony sell-off” detached from economic fundamentals, presenting a buying opportunity once the market stabilized.

• 2015 Flash Crash: On August 24, 2015, the Dow dropped about 1,000 points at market open amidst fears of the Federal Reserve raising interest rates and concerns over the Chinese market (32:30). Similar to the 2010 event, the decline was driven by automated trading and margin-induced selling, rather than any underlying economic distress.

Cramer underscores that these flash crashes were driven by market mechanics rather than economic fundamentals, allowing informed investors to capitalize on the temporary dislocations.

Comparing Different Types of Sell-offs

Cramer distinguishes between sell-offs caused by economic downturns and those resulting from mechanical failures within the market.

• Economic-Driven Sell-offs: These involve genuine economic distress, such as plummeting employment or failing major financial institutions. Cramer notes, “If you have a decline that could be joined at the hip with the real economy, one that has true systemic risk” (21:16). Such downturns are rare and require cautious investment strategies.

• Mechanical Sell-offs: Triggered by market dysfunctions like automated trading errors or excessive margin borrowing, these sell-offs are often devoid of economic justification. Cramer advises that recognizing the cause is crucial for identifying investment opportunities.

Practical Advice for Investors During Sell-offs

Cramer provides actionable strategies for investors to navigate different types of market declines:

1. Accidental High Yielders: Look for solid companies with robust balance sheets whose stock prices have fallen, resulting in unusually high dividend yields. These represent potential buying opportunities (32:30).

   “What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly. That is nirvana for me.” – Jim Cramer (10:15)

2. Using Limit Orders: During a crash, use limit orders instead of market orders to avoid unfavorable prices.

   “Don't use market orders because you might end up getting terrible prices.” – Jim Cramer (32:30)

3. Avoid High-Yield Dividend Stocks During Fed Tightening: When the Federal Reserve raises interest rates, high-yield dividend stocks become less attractive compared to bonds. Instead, focus on companies that are resilient regardless of economic conditions.

   “Please be careful of these dividend stocks as safe havens when you're dealing with a sell-off caused by the Fed.” – Jim Cramer (36:13)

4. Identify Margin-Induced Declines: Recognize when sell-offs are driven by margin calls, typically between 1 and 2 PM, and target safety stocks like healthcare or secular growth plays after these periods (36:13).

5. Political and International Sell-offs: Assess whether international or political events genuinely impact your portfolio's American stocks. Often, these sell-offs are overblown and don’t warrant selling if your investments are fundamentally strong.

   “Ask yourself, do any of these woes truly impact the stocks of the American companies in your portfolio?” – Jim Cramer (32:30)

Lightning Round: Listener Questions and Cramer's Insights

The latter part of the episode features an interactive Q&A segment where Cramer addresses direct questions from listeners:

1. Roth IRAs for Grandchildren (10:00)

   • A listener asks about opening non-deductible Roth IRAs for grandchildren. Cramer advises a growth fund approach for young investors, emphasizing higher risk tolerance to maximize long-term gains.

     “I want you to be in growth, growth for growth. Because they're young, you can switch the index in the 30s.” – Jim Cramer (10:15)

2. Buying Stocks Post-Earnings Dip (10:37)

   • A caller inquires about purchasing a stock after it reports good earnings but the market buys it down. Cramer recommends buying at your desired price incrementally rather than all at once to mitigate risk.

     “You buy a little bit at the beginning and then like we teach at the club, you buy it on the way down.” – Jim Cramer (11:03)

3. High-Yield Dividend Stocks as Investment (28:30)

   • A listener from Washington asks about the risks and benefits of high-yield dividend stocks. Cramer emphasizes selecting solid companies with sustainable dividends rather than chasing excessively high yields.

     “What I want are very solid companies with good balance sheets to pay dividends that we reinvest constantly.” – Jim Cramer (28:30)

4. Selling Stocks After Averaging Down (44:03)

   • Michelle from California questions when to sell stocks that have been in the red for years despite averaging down. Cramer advises holding onto them if the outlook remains strong, as the future potential outweighs temporary setbacks.

     “If the outlook is still strong, you want to hold on.” – Jim Cramer (44:03)

Conclusion and Final Takeaways

Wrapping up the episode, Cramer reiterates the importance of discerning the underlying causes of market declines to make informed investment decisions. He encourages investors to remain disciplined, avoid panic selling, and seize opportunities presented by mechanical sell-offs.

“Unless they involve systemic risk, which is increasingly rare like in 2007, they're going to prove to be buying opportunities long term.” – Jim Cramer (36:13)

Cramer also highlights the continuous nature of market fluctuations, reassuring listeners that with the right strategies, they can navigate both good and bad market days effectively.

Notable Quotes

• “Tough days do not last forever, but when they come along you need to know how to respond.” (02:20)
• “All happy rallies are alike. Each sell-off is unhappy in its own way.” (04:00)
• “It's better to be lucky than good. But discipline can help maximize your luck.” (09:00)
• “Fear can't be legislated or regulated out of the market. It will always be there.” (21:16)
• “Make sure your stocks have nothing to do with the political fray if you want to avoid unnecessary risk.” (36:13)

Final Thoughts

Jim Cramer's comprehensive analysis in this episode serves as a valuable guide for investors facing market uncertainties. By understanding the distinct causes behind sell-offs and implementing disciplined investment strategies, listeners are better equipped to protect and grow their investments even in volatile times.