Mad Money w/ Jim Cramer 6/17/25
44:25 Share

Trading at Schwab is now powered by Ameritrade, unlocking the power of Thinkorswim, the award-winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on Thinkorswim Desktop with robust charting and analysis tools, all while you uncover new opportunities with up-to-the-minute market news and insights. Thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly.

Ryan Reynolds here from Mint Mobile. With the price of just about everything going up, we thought we'd bring our prices down. So to help us, we brought in a reverse auctioneer, which is apparently a thing. Give it a try at mintmobile.com slash switch.

Upfront payment of $45 for three-month plan equivalent to $15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. CMintMobile.com. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Kramerica. Other people want to make friends? I'm just trying to make you a little money. My job is not just to entertain, but to educate you. So call me at 1-800-743-CNBC or tweet me at Jim Kramer.

If you spend much time watching this network, you've heard endless chatter about the Federal Reserve, the business cycle, tariffs and trade, and of course, all the ways our trading partners try to get over on us by breaking the rules of the Great Arbiter, the World Trade Organization, or at least breaking them in spirit.

But for all the relentless focus on the Fed or trade policy or the inherent boom and bust nature of the economy, we don't always do a great job of putting this stuff into context and explaining why it matters to you. And I include myself in this. There are periods of time when on any given night, you'll see me ranting about how maybe the Fed chiefs made a mistake in the fight against inflation or unemployment. Then he makes one statement. Suddenly I'm acting like the guy's the best thing since sliced bread. A responsible guy.

A kind man, a good man who's doing an amazing job that the stock market absolutely loves. At least until the next meeting.

See, there's a problem in finance and journalism where we can get so inside baseball that we forget to lay everything out in a way that everybody can understand. Even if you don't have a job at an investment bank or an economics degree. That's why my mission is to take these concepts and make them accessible. So home gamers like you can analyze stocks with the same level of rigor as the professionals. The same way we do with the CNBC Investing Club, which I think you should join.

But there's only so much time in any one show, and there's a lot to cover every day. That's why tonight I'm stepping back and explaining everything you need to know about the Fed, the business cycle, macroeconomics. This stuff is essential. Don't worry, I'll make it interesting. You know me. Let's start with the Federal Reserve.

We often act like the Federal Reserve is really all important. The only thing we need to know, sometimes it's true, although mostly it's an exaggeration. You'll hear metaphors about the Fed when they cut interest rates, they're tapping the accelerator in the economy, causing it to speed up when they raise interest rates, they're slamming on the brakes. You hear all this stuff. It does drive me crazy.

Okay, so that's a pretty good shorthand that I just gave you. But tonight I want you to understand precisely how this mechanism works. Rather than trying to tackle this on a case-by-case basis like we normally do, higher rates are good for the banks, but bad for housing as mortgage rates rise. They're bad for autos as car payments go up. Bad for businesses. It becomes more expensive to expand or bring in new inventory because of credit. In other words, I want you to know why so many of us fear the Fed.

in down markets while at the same time looking to them for our financial salvation.

now let me start by saying some stuff that should be obvious the federal reserve is not some secret cabal that controls the economy from the shadows they're not the illuminati they have no connection with the house of thurn and taxes postal system in reality the feds overseen by a board of governors all of whom are appointed by the president united states and confirmed by the senate but once they're appointed the president can't fire them which is why we talk about it like an independent agency

So what is the Fed? It's a central bank, exactly like the central bank of every other developed country. These are independent government agencies that are in charge of monetary policy, meaning the money supply and interest rates, and they also regulate parts of the financial sector.

When you hear me say the Fed's tightening or easing, I'm talking about short-term interest rates. See, by law, our central bank does have the power to set what's known as the federal funds rate, the shortest of short-term interest rates that banks can borrow at overnight with no collateral. When you hear the Fed's raising or cutting, that's really the rate we're talking about.

So why doesn't an independent agency set interest rates? Well, that's a great question. It's because our central bank has this, what we call, dual mandate from Congress. They're supposed to promote both maximum employment and stable prices. In other words, their job is to keep inflation in check without tanking the economy. Now, sometimes that means doing things that are very unpopular.

like raising interest rates aggressively, which is typically very bad for the stock market. Very bad for you. That's why you can't have elected officials making monetary policy. The fear is they won't be ruthless enough if they need to worry about getting reelected. That makes sense to me. So how does the mechanism work? How does short-term interest rates set by the Fed affect inflation and employment? All right, let's say the Fed takes the Fed funds rate from 2% to 2.25%.

How does that tap the brakes in the economy? First, even a quarter point rate hike makes it more expensive for banks to borrow money short term. And you better believe the banks pass that on to you, the customer. So if you want a relatively short term loan, it's going to cost you more money. Say you're a small business with a revolving credit facility. Suddenly it's more expensive for you to borrow, which means you're less likely to expand. When money's cheap, it's easy to open a new location or hire new workers. But when borrowing costs rise,

The economics of expanding your business becomes much less forgiving. It becomes dangerous. Every time the Fed tightens, businesses get a little more cautious, and that reverberates through the entire economy. Eventually, as the pace of hiring slows down, the unemployment rate will start ticking higher. Look, we may even go into recession. We've had many Fed-mandated recessions followed by just as many Fed-mandated recoveries. It's a cycle.

Now, why would they want to throw so many people out of work? Remember, part of the Fed's job is to promote employment. But the other part, I think, is often more important. That's to stamp out inflation. And that same things that crush inflation also tend to crush the economy. When inflation gets out of control, you know what it does? It destroys a lot of wealth. And high prices make life miserable for everyone. Plus, as we've learned in recent years, inflation can be very difficult to stamp out if you let it get some speed.

From the Fed's perspective, the most dangerous kind of inflation is wage inflation. Once businesses feel compelled to steadily raise wages in order to keep their employees, they have to raise their prices to pass on those labor costs to the consumer. That's really the story of 2022 and 2023 in a nutshell. Meanwhile, workers have more money to spend. That translates into more demand for just about anything and thus higher price spirals. Suddenly there's inflation everywhere. And those higher wages are meaningless because everything's gotten much more expensive.

This is the main point, though. When you see inflation, that should scare you because that means the Fed will raise interest rates to stamp it out. They're going to do their job. Either it means sending the economy into a tailspin. That's why we watch the Fed like a hawk. That's why we debate how many rate hikes the economy can handle before it topples. And it's why I tell you that bad news is good news when the Fed's tightening, because the worse things get, the more likely it is for the Fed to ease up.

It's also why it becomes easier to own stocks once the Fed stops tightening and starts cutting rates. The bottom line, we fear the Fed because the Fed sets interest rates. And if they get it wrong, they can allow inflation to run unchecked or do some real damage to the economy and you. We adore the Fed because when they get it right, the results can be very, very good for the stock market. Either way, as much as I like to talk stocks all night, I've got to tell you,

I can't afford doing the word of the Federal Reserve. I want to start the calls with Steve in Florida. Steve. Hi, Jim. Congratulations on 20 years of mad money. You're very kind. Thank you, Steve. How can I help? We learned a lot from you. Thank you. My question is, buying an ETF like ITA in the defense sector, does it make sense to buy the best of breed in that same sector at the same time?

Like Lockheed or even Palantir. No, you got to do one or the other. Got to do one or the other. Now, this thing, let me tell you the way this works. You get a lot of mediocre companies and some really great companies. I like AeroEnvironment because they make drones and they do a terrific job. You know I'm partial to Lockheed Martin. Either one of them is better than owning this because they're going to give you the mediocre ones but the good ones. Why do I want the mediocre ones? Let's go to Armin in Texas. Armin. Hi, Armin. Hello.

It's Jim. What's up? Hey, Jim. Booyah. Booyah. I mean, thank you for calling. How can I help you? Hey, what do you think about yield max stocks? They give an incredible amount of dividend, you know, 100 percent and plus. I think it's OK. It's OK. I'm a huge believer that I got to know what I own.

I don't like to own anything that I don't know that I own because I think I'm a discerning individual who can avoid the bad and pick the good. But I have a lot of time to be able to do this, and I've got some experience doing it. That may be good for people who just say, I want income, and therefore they feel they're diversified enough that they'll be okay. All right, look, I'm a stock guy first, but even I know that in this market, in any market, you never afford to ignore the Fed.

I'm demystifying the Federal Reserve and everything it does for quantitative easing to adopt lots of so-called Fed speak and more. It's Fed night and we're just getting started. So stay with Kramer.

Don't miss a second of Mad Money. Follow at Jim Kramer on X. Have a question? Tweet Kramer. Hashtag Mad Mentions. Send Jim an email to madmoneyatcnbc.com or give us a call at 1-800-743-CNBC. Miss something? Head to madmoney.cnbc.com.

Trading at Schwab is now powered by Ameritrade. Unlocking the power of thinkorswim, the award-winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools, all while you uncover new opportunities with up-to-the-minute market news and insights. thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly.

Learn more at Schwab.com slash trading. Ryan Reynolds here from Mint Mobile. With the price of just about everything going up, we thought we'd bring our prices down. So to help us, we brought in a reverse auctioneer, which is apparently a thing. Mint Mobile Unlimited Premium Wireless. Give it a try at MintMobile.com slash switch.

Upfront payment of $45 for three-month plan equivalent to $15 per month required. New customer offer for first three months only. Speed slow after 35 gigabytes if network's busy. Taxes and fees extra. See mintmobile.com. At Capella University, learning online doesn't mean learning alone. You'll get dedicated support from people who care about your success. A different future is closer than you think with Capella University. Learn more at capella.edu.

There are times when, if you tune into the show, it's all about the Federal Reserve and trade policy all the time. I prefer to focus on the fundamentals of individual companies. You know that. Trying to help you identify winning stocks. But there are moments when these big picture macro forces trump what's going on at the companies themselves. No pun intended.

we just went over the federal reserve what they really do why they feel compelled to raise interest rates in a strong economy why those higher rates are bad for business for the vast majority of the companies we follow and why the fed eases uh up with when the economy gets too weak to try to get it back going again but there's another mechanism that makes rate hikes devastating to wall street long before the damage spreads to main street it's the same reason that stocks soar when we get a signal that the rate hikes will stop i'm talking about the very nature of the stock market itself

I like to say that the market's a forecasting machine. The business is all about anticipation. Millions of traders and investors make bets on stocks. Each one of them is trying to predict the future, not looking at their screen and saying, oh, that's the price. Take it individually. Tons of these wagers will turn out to be wrong.

Taken together, the market is surprisingly good at making predictions. The end result is that the stock market tends to reflect not the present, but Wall Street's collective views about the future. Say six to nine months out, that's the worldview. So when we get a new piece of data that changes our impression of the future, it could have a dramatic impact on stock prices immediately.

If money managers suddenly get the sense that the economy is going to gradually slow down over the next six months, what happens? Stocks don't go down gradually along with the economy over the next half year. No, stocks go down immediately, violently, because so many investors are suddenly anticipating a slowdown and they take action. That's how you end up with a horrific decline like we had in 2022. I say decline, but really, you know what? It was a sudden onset of a bear market.

coming into the end of 2021 if you didn't look too close too closely the economy seemed to be on fire employment was incredible aside from some signs of fraud businesses booming during the pandemic the fed had cut interest rates to nothing they were practically printing money so we got all sorts of business formation tons of low quality ipos i should add not to mention those garbage spacks that you know i hated so much but come november 2021 the fed warned that inflation was getting out of hand and red eggs were on the way immediately all the highest flying growth stocks

got obliterated. And they spent the better part of the next year plummeting. These things instantly became untouchable. The rest of the market hung in there before finally peaking in the first few days of January 2022.

While the Fed didn't actually start raising rates until that March, we all knew the hikes were on the way. And given the ramp up in inflation, it looked like they could be brutal. Wall Street anticipated pain, which is why the S&P 500 lost more than 25% of its value from the peak in January of 2022 to the lows that October. At that point, inflation was totally out of control to the point where investors panicked. And that's they created a hideous decline.

But then long-term interest rates, the kind that are set by the actual market, not by the Fed, started coming down. And everyone took that as a signal that the Fed might be less aggressive with the rate hikes. Something similar happened in a year later. In 2023, there was constant speculation about when the Fed might be willing to stop hiking rates. And by the time we processed that the hikes were truly over and done with by that October, the stock market had taken off. You got to anticipate. Well,

While we spent much of 2024 wondering when the Fed would start cutting rates and how many cuts we'd eventually get, none of that really mattered. While lots of journalists and money managers like to harp on the details, the most important factor here is simply knowing whether the Fed is your friend or your enemy. When the Fed is your friend, meaning when rate hikes are off the table and rate cuts are on the table, the stock market can just roar.

As Wall Street can see the potential for cuts coming, we'll get a fabulous bull market. And that's one reason why 2024 was so great for stocks, even though the rate cuts didn't start until September. And even when the Fed came through, the bond market refused to play ball. In the end, though, that couldn't derail us. As long as the Fed is your friend, it's simply much easier to own stocks. Always remember that.

This is why we pay so much attention to the Federal Reserve. Its pronouncements affect the trajectory of the economy. The market reacts rapidly to any of these changes, and anything perceived as a big change has the potential to either crush the averages or

catapult them into the stratosphere. The key here is that nobody's waiting around patiently to see how everything pans out. If the Fed chief says we're raising rates three times next year, traders don't sell next year. They sell right now. If the Fed chief walks back that decision, well, the traders will turn around and buy those same stocks hand over fist. The bottom line here, everything

Everyone in this business is constantly looking at the data to piece together their own worldview, a view of how things will look in the near to medium term future. When the Fed or the president or some foreign actor does something that dramatically alters Wall Street's worldview for the worse,

it can slay a bull market blink of an eye, leading to some frightening declines, which is why I'm trying to prepare you for them either in any business cycle. Get my back. Coming up, you may not always have to care about the Fed, but when they make their presence known, do you know how to react? Kramer's breaking it down for you next.

Let me nail this one. I think he's enjoying this. Well, let's just put it away. That's what I want. Jim, Jim, it's all over the cafe. My attention producer's a vegetarian. I thought I'd go some other place. Let's get him.

So we'll go over the skid pad, I'll do some drifting, and then we'll do a burnout. You sure you don't want to drive? No, no, no, you're in control and I really appreciate that. Say it while I'm going up? Yeah, exactly. One shot. Okay, ready? Let's go.

Hey, I'm Kramer. Hey, I'm Kramer. Hey, I'm Kramer. Welcome to Mad Money. Welcome to Mad Money. Welcome to Mad Money. Welcome to Kramerica. Welcome to Kramerica. Hello from the city of brotherly love, 140 miles off the coast of Louisiana. Welcome to Dreamforce Conference in San Francisco. I'm on a boat.

We're on the Mississippi River in front of New Core Steel, Louisiana. Mad money is in the heart of steel country. Mad money is boots on the ground in the badlands. This is what we'll do. Find good ideas to invest in America. Who says we don't make anything anymore?

Trading at Schwab is now powered by Ameritrade. Unlocking the power of thinkorswim, the award-winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on thinkorswim desktop with robust charting and analysis tools, all while you uncover new opportunities with up-to-the-minute market news and insights. thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly.

Learn more at schwab.com slash trading. Dealing with hydrogenitis superativa, HS, is tough. But you're not alone. Before I started Cosintix, I looked at the website and saw it had many years of clinical research. That made me feel confident.

Cosintix Secukinumab is prescribed for adults with moderate to severe hydrodinitis suprativa, HS. Don't use if allergic to Cosintix. Get checked for TB before starting. Increased risk of infections and lowered ability to fight them may occur, like TB or other serious bacterial, fungal, or viral infections. Some were fatal. Tell your doctor if you have an infection or symptoms, like fevers, sweats, chills, muscle aches, or cough. Had a vaccine or plan to, or if IBD symptoms develop or worsen.

Serious allergic reactions and severe eczema-like skin reactions may occur. Learn more at 1-844-COSENTIX or cosentix.com. Don't wait. Ask your dermatologist about Cosentix. Wall Street's always looking for signals, signals from all over the place, but especially from the Federal Reserve, which is why I keep coming back to this subject. I just explained what happens when the Fed signals that it's going to strangle the life out of the economy in order to curb inflation.

Investors figure that we're headed into a slowdown, the stock market plummets, and it tends to stay down. Now let's talk about the other side of the coin, because while the Fed can be the ultimate destroyer of value, it can also be our salvation. That's the thing about a Fed-mandated slowdown. It's man-made, and anything that's man-made can be unmade. As the economy cools down, sooner or later the Fed will stop tightening. If that's not enough to turn things around, and it rarely is, they'll be at ease. Wall Street speak for cutting interest rates.

Remember all the reasons why higher rates hurt business? They make it more expensive to borrow, becomes more expensive for companies to expand, more difficult for you to buy a new home. People and companies start putting new projects on hold or canceling them. Then as economic activity slows down, you start to get layoffs, which in turn leads to even less consumer spending and so on. It's a vicious cycle down. But

but cutting interest rates does the opposite. When the Fed starts easing, it becomes cheaper for companies to borrow money short term. At the same time, you get a lower return from leaving your cash in a checking account or certificate of deposit. So everybody from the largest corporations to regular individuals suddenly has less incentive to save and more incentive to spend

Spend that money, invest it in riskier assets too. Banks become more willing to lend because the federal funds rate is the lowest rate at which they can borrow, even as their profitability tends to take a hit. The financials are one of the very few groups that typically benefits from higher rates, not so much from lower rates. Put it all together and you get what really amounts to a virtuous circle. Consumers spend more money, businesses respond to the pickup and demand by expanding, and with every additional rate cut, the

The cost of expanding gets lower. That translates into more hiring, more people collecting paychecks, more people buying stuff. So businesses expand still further, creating yet more jobs, spurring still more spending, and so on. House of pleasure. Of course, the stock market tries to anticipate all this ahead of time. In other words, the moment the Fed signals that its rate hikes are over and it might even have some serious rate cups up its sleeve, well,

Well, the averages will take off, like I mentioned earlier. Money managers assume that happy days are here again, so they buy the same cyclical stocks they wouldn't touch with a 10-foot pole when the Fed was tightening. They dump the recession-proof stops. Well, they hate those. And they don't need a good economy to thrive because, well, their year-over-year earnings growth will pale in comparison to the growth from, say, beating down homebuilders, industrials, automakers. That's it.

That's what you buy. Again, nobody actually waits for break cuts to work their magic. If you wait that long, you know what you're going to do? You're going to miss the move. The buying starts once portfolio managers have some reason to believe a Fed-mandated slowdown is about to turn into a Fed-mandated acceleration. Really fulcrum moment there, people. And it doesn't even need to be that dramatic. The Fed can just stop tightening like it did halfway through 2023. And eventually the bullish animal spirits take over.

Like I just told you, any problem that's man-made can be unmade, and you need to factor this into your calculus or you miss out on some really major moves. The difficulty here is anticipating when an institution like the Federal Reserve will change course. You can collect every piece of data, talk to dozens of CEOs across a wide range of industries, and still get it wrong. It's happened to me if the people running the Fed are clueless.

Legendarily, I've called them out on this. Now, sometimes this is easier to do than others. Not only after Jay Powell was sworn in as Fed chief, he decided to take a hard line against inflation, which is mostly non-existent at that point. But Powell sounded very hawkish. So in October of 2018, a really ugly moment, the market was hit with a vicious sell-off.

In part, that's because we didn't really know how J-PAL would behave, not back in 2018. He was relatively new to the job. We knew how his predecessor, Janet Yellen, liked to operate, but we didn't have that much insight into how Powell would do the job, whether he'd be data dependent like Yellen or doctrinaire like Ben Bernanke going into the financial crisis. Fortunately, he turned out to be more data dependent than many of us feared. And when you have a rational Fed chief like Powell, who actually does the homework like Powell, then you can be more confident about making predictions. It

If you know what the Fed's worried about, if you know what they're watching, then it's easier to go out on a limb and bet on stocks when you believe they're about to change course. Sure enough, a couple months later, Powell changed course. The last rate increase of that cycle was in December 2018. And by mid-2019, the Fed was cutting again. He never made the same mistake again, although many would argue he later made the

opposite mistake, being too slow to stamp out inflation when it started rampaging in 2021. I think that's just second guessing. What about rate cuts? Once the Fed starts easing, not just pausing its rate hikes, but cutting rates to spur economic growth, Wall Street has a playbook and hedge funds manage hit for managers. Well, they follow it religiously.

They sell the recession-proof stocks, that's the utilities, the consumer staples, and they buy the cyclicals, meaning the companies that can make fortunes when the economy accelerates. Now, by the way, we do not follow this playbook religiously for the charitable trust because I believe maintaining a diversified portfolio, I don't like to trade in and out. We don't do that. But we are very much aware of it and it assists in our decision-making, as you know, if you would join the club. Often when we get these Fed-induced rotations, the proverbial baby gets thrown out with the bathwater.

But you need to be careful when you start picking stocks that have gone out of style because money managers are betting on recovery or a showdown, a slowdown for that matter. They're going to hurt you. And this kind of move, nobody particularly cares about valuation. Growth-oriented hedge funds will never stop selling stocks in an out-of-favor group just because they've gotten too cheap. That's beside the point. They don't want to fight the Fed in either direction. Let me say one more thing. Most of the time, you don't need to watch the Fed like a hawk.

It's only when we're at an inflection point, like when the economy gets overheated, or when interest rates rise to the point where business really starts to slow down, that the Fed becomes so important. Jay Palast presided over a very eventful period with a lot of tough decisions. My favorite thing about his predecessor, Janet Yellen, was that you could safely ignore her.

Yellen was very clear about her plan. She was very measured. And so most of the time, her public statements were practically, well, let's say, non-events. Of course, she presided over an unusual period in our economy where we had very little inflation, but not much growth either. My point is that you don't always need to care about the Fed. The bottom line.

When the Federal Reserve matters, when it's tightening too aggressively or when it's easing, it's about to start easing. Well, then it really, really matters. And now you know exactly why that's the case. I need to go to Keith in New York. Keith.

Mr. Kramer, thank you so much for this opportunity. I'm 60 years old. I'm retired. Never really kind of got into the financial market. Wondering, is it kind of too late for a person trying to...

Absolutely not. I'll tell you, it's only late for a person who really has a cynical, negative and not constructive view about their own lives. 60 is young. I think you've got many years. I think you should be owning a mixture of growth stocks and also income stocks. And I feel that if you don't get started now, it would be a mistake. And I feel very strongly about that. Let's go to Doris in Indiana. Doris. Hi, Jim. I love Mad Money. Thanks for sharing. You rock.

Thank you, Doris. Thank you very much. I appreciate that. I mean it. I mean it. How can I help you? Could you share some tips on how to evaluate and choose great uranium mining companies? Thank you.

Yeah. OK, so great uranium mining companies. Well, first, I'm going to tell you, the only company that really understands nuclear power in this country is GE Vernova. The others, the great uranium company, there really aren't any. And if I said some, I think you're going to discover that it may not turn out to be any good. GE Vernova knows how to build a new plant. That's what you want to do. All right. Here we go.

You don't always need to care about the Fed, but when it matters, it really matters. Much more than Ed Moneyhead. I'm getting granular and taking you to the history books to show you just how influential the Fed can be to this market. And when it wants to be, that is. And later, I'm taking your questions. Class is in session, so stick with Kramer.

Now we've seen what happens when the Fed typically raises rates, but it doesn't always go as smoothly as 2022, even as that year was far from smooth for the stock market. Compared to some other moments, though, that decline is nothing. So let's talk about sudden extreme bouts of weakness. Let's talk crashes, including crashes exacerbated by the Fed. Sooner or later, it will happen again. I want you to be ready for it. My whole career, I've only recommended selling everything four times.

October 15th of 1987, October 8th of 1998, March of 2000, and most importantly, October of 2008. Three of these calls were dead right.

Kind of amazing. One was dead wrong. Really amazing. Almost destroyed my hedge fund. First, there's the crash of 87. Going into the year, things were looking pretty darn good. The economy accelerated. Our stock market was flooded with Japanese money. This was the 80s when Japan was the rising economic power in the world. And they had no qualms about purchasing American stocks at virtually any price.

Their buying drove up valuations to absurd levels. At the peak, the Dow was selling for 29 times earnings, which was insane. Even in a blazing hot economy, that'd be ridiculously expensive. We had already pulled back a bit from the late August highs, 2700, heading into October of 87. Then the true crash occurred in two stages. First, we set about 400 points from the 2600 level in a hideous middle of October.

Then we had Black Monday and Terrible Tuesday, which knocked off more than 600 points in two days. All told, the market lost nearly 40% of its value in a few weeks' time.

What caused the decline? Well, it was a group of charlatans, yes, I said charlatans, that had been selling a fancy new product that was called portfolio insurance. Basically used futures to stop out any fund down about 5%. But the S&P futures were still a relatively new thing, and they didn't work as advertised. Down 5%, the insurance kicked in, which then led to a flood of sell orders and a wipeout of bids on both the New York Stock Exchange and the NASDAQ. It was like throwing gasoline on an already burning building.

New York could not handle Chicago's selling. That's the futures in Chicago. It was too fast. It was too furious. And the result was the Black Monday crash.

Now, the 87 crash was based on nothing more than overvaluation and these failed products like portfolio insurance, which ended up not insuring anything. But the actual economy, guess what? It was doing just fine. A year later, even if you bought the stocks traded most actively right before the crash, you still made back all your losses within 12 months. If you were in cash like we were at my hedge fund, in part because Karen Kramer didn't like the action, it was, let's call it an amazing buying opportunity after the crash.

October of 87 made my reputation, but October of 1998, it almost destroyed it. See, in 98, the market had been weak for much of September, thanks to the long-term capital crisis. This was a huge hedge fund, or at least huge by the standards at the time. It blew itself up and needed to unwind some very large positions. The spillover threatened to bring down many banks, yet the Fed seemed oblivious to the situation. The thing is, whenever there's a new problem, the Fed always seems oblivious, right up until it isn't.

At the time, I sensed a total collapse. My own hedge fund was underperforming and we'd just been hit with massive redemptions. Investors were pulling their money out. At the absolute low point of the decline, you know, on October 8th, I panicked. And in a very remembered moment, I wrote a piece that was entitled,

Give it its title. Get out now for the street dot com. We repeat that. Get out now because it came legendary. See, two hours later, Alan Greenspan, the Fed chairman at the time, he came to a census. He announced an emergency rate cut with lots of promised liquidity. The market took off. Never look back. Making my get out now call perhaps the worst professional mistake of my life. You know, once it's in the once it's on the site, you can't take it down.

I learned an important lesson in 98. Even if the Fed seems to be asleep at the wheel, they can still wake up and course correct at any moment, especially if the market's doing badly. How about 2000? The dot-com crash seems almost boring by comparison. The Nasdaq had an epic run in the late 90s. Tech stocks exploded to absurd levels. Then in early 2000, the rally accelerated with the whole group flying further into the stratosphere. It was a classic speculative bubble.

just like we saw in 2021. And I'm glad to say I rode it almost all the way up. I told people to get out a week before the top, and we made some major short bets against the Nasdaq at my hedge fund, all of which were explained, all of which were public. As the dotcoms rolled over, the collapse wiped out more than a trillion dollars of capital.

But in terms of the broader economy, the impact was surprisingly limited. In short, the dot-com collapse was all about ridiculous overvaluation and nothing else. So while the tech-heavy Nasdaq got obliterated, the more diversified S&P 500 barely got dinged.

Finally, there's the financial crisis in 2008. Unlike the other meltdowns, this one was deeply rooted in the economy. However, even though anything with housing exposure was an accident waiting to happen, remember all those defaulting no-doc loans, right? With ridiculously low to non-existent down payments and adjustable mortgage rates, it's important to recognize that the Federal Reserve pushed us over the edge with

a tone-deaf series of lockstep rate hikes. There was no avoiding some kind of crisis, but if Ben Bernanke had done his homework, it might have been a normal recession, not a great recession. Unfortunately, the Fed believed the economy was strong. They couldn't see the rot underneath. They were so wrong.

And the rest of us paid the price for their cluelessness. Unlike Jerome Powell, Bernanke didn't come to a census until it was too late. By the time the Fed realized the death of the problem in 2008, over a year after my they-know-nothing rant, Lehman Brothers had already gone under and AIG was on the precipice. And even after the mother-of-all-government bailouts, the stock market still didn't bottom until March of 2009. Why? Ben Bernanke came on 60 Minutes and told us he wouldn't let any more major banks go under. 60 Minutes?

So whenever we got hit with a major decline, you should run it through the rubric of these four breakdowns. In 1987, the machines ran roughshod over the buyers. Portfolio insurance ran roughshod over us. Much like the algorithms that ETS do these days whenever things got ugly. Dotcom bombed in 2001 because of reckless underwriting. Too many garbage quality IPOs and secondary offerings caused the whole thing to collapse. It was under its own weight, again, just like 2021.

When I told people to get into cash in October of 2008, when the Dow was around 10,200, I got a lot of hate. Conventional wisdom was that I was being insanely irresponsible. Of course, if you listen to me, you sidestep the hideous decline. Financial crisis was caused by genuine systemic risk, even if the very real problems were made worse by a clueless Federal Reserve.

Now, in 1998, I messed up. Problem of long-term capital was easily solved as soon as the Fed decided to take action. Just a few days before Alan Greenspan's emergency rate cut, he had been reassuring us about the strength of the system. No cut needed. You know, what he was just doing was turning out to be completely wrong.

Bottom line, whenever the market goes into a tailspin, whether it's a Fed mandated decline or if it's caused by the White House or by the real weakness in the economy, you should try to understand why it's happening, because that has a huge impact on what happens next. And it's often the key to saving or losing a ton of money. Man, money is back.

After the break. Coming up, some clairvoyant sectors of the market can predict a rate cut before we get one. Kramer is dealing with the names to watch when the temperature of the economy is running hot or cold. Next.

Hey, one more thing. We talk about the Federal Reserve like it's all powerful. I know. Look, I'm guilty of this myself. But while the Fed can make things better or worse, at the end of the day, we still have a market economy. And markets are inherently boom and bust creatures. Now, you can have the most sagacious Fed chief in history.

they still wouldn't be able to stop a truly terrible recession in its tracks. So if you want to manage your own portfolio of stocks rather than just sticking your money in an index fund and forgetting about it, this is what I care so much about. You should try to get your own read on the economy. Remember, I favor index funds for bedrock investing and then stocks for your discretionary money portfolio. That is a radical view. I don't care. How do you do it?

It's not like most people are speaking to CEOs every day and getting a really in-depth look at how their businesses are doing. Beyond watching me, which of course goes without saying, what else can you do? What else do you look at? Maybe someday Elon Musk will come up with a chip that lets you download CNBC directly in your brain.

For now, though, we have to do things a somewhat old-fashioned way. For example, when the economy is humming along and the employment numbers look incredible, you need to watch certain key groups of stocks that will often signal when a slowdown is on its way. Some sectors are a lot more economically sensitive than others, or they just tend to get hurt early on in the course of recession. All right, so let's take housing and automobiles.

When the economy heats up and long-term interest rates rise, something that happens naturally in expansion, well, that eventually crushes the homebuilders and the car companies. Why? Because the moment it becomes more expensive for consumers to take out a mortgage or get financing for a car, well, they start getting their sales hit.

So when you see the stocks, the homebuilders, and the orders performing terribly, that's often a signal telling you that the economy is about to peak. At the very least, it means lots of investors are betting on a peak. You often see these two groups collapse several months before the Fed starts raising short-term interest rates.

They tell you ahead of time. What else? There are all kinds of basic building block commodity companies that get hammered in the early days of the slowdown. The paper stocks are a good example. The commodity chemical makers. Paper declines can signal less packaging. Think liner board. You need it to ship just about everything. So it's a great barometer of global commerce. Plastic, like it or not, goes into everything and it's a real good tell. Of all the metals...

Copper is the most sensitive. You watch the price of copper and it'll tell you a lot about the global economy. Copper actually peaked a couple of weeks before the Fed first raised interest rates in March of 2022. Then the price of the red metal plunged through mid-July before finally finding its footing. At that point, everybody understood that the economy was rapidly decelerating thanks to rampant inflation, which led to the Fed's aggressive rate hikes. The only reliable way to stamp out inflation.

So here's the bottom line. The action in the stock market doesn't always sync up perfectly with the real world, but various sectors come in and out of fashion based on the real world health of the economy. You need to know how to take the economy's temperature and look at the unemployment rate or listen to pundits, even me.

It doesn't really cut it. So watch the home builders, watch the automakers, watch the paper stocks, and particularly watch the price of copper. That way you won't feel clueless the next time something goes wrong, and you'll have a much better idea of what to do with your stocks. Stick to Kramer. Coming up, Kramer's taking your questions. Don't miss his deep dives into the trickiest parts of this tape. Next. Next.

Am I happy? Because it's the lightning round! Lightning round! Lightning round! Lightning round! I'm Kramer's man, money! This is where I take your calls, rapid fire. This is where I take your calls, rapid fire. Rapid fire calls. Rapid fire calls! One after another! You just need to handle this, Doc. I tell you whether or not...

Are you ready?

All right. Park in Hawaii. Let's go to Janet in Colorado. Janet, let's go to Kyle in Oklahoma. Hey, hello, Professor Kramer. Thanks for making my life a little happier place to be. Who are you, Sam? I'm P.O.P.,

Pepsi-Cola. Oh, I love that Booyah. Super 5 Booyah. I'm enjoying that entirely. This is an exam cramming, ramen noodle heating, college-like Booyah from Colorado State, Fort Collins. Kramer's Ice Cream Booyah. You are so hot on all your picks.

Yeah, yeah, and what do you want? I want to say thank you for not just the money, Jim, but what the money translates into, in my case, a college education for my son. They have no respect for when I am talking about a company that I just bought a tuxedo at. I taught high school for 42 years. If your show was a required part of life skills classes, we'd have generations of financially savvy Americans. Yeah, uh...

Regina, help me. I want to tell that guy who's ringing the buzzer that he is about to be fired. If he ever does... Where is he? Come on. Come with me. We're finding this clown. Is he back here somewhere? Who is buzzing me? Who is buzzing me? Which one of you? You're all fired.

And for my next trick, I turn to the smartest audience in the world, the Mad Money audience, and we'll take your questions and a few tweets. Why not? Hey, let's start with Laura in Michigan who asks, when building a position in a stock, is the general rule to buy when the price of the stock pulls back

5% lower than the price paid for the initial purchase. If the stock continues to rise, it's best to add your position by regularly buying a bit every two to four weeks. Wow, is this hard. Okay, I actually want to do this for you. I say you buy your first, and then you're absolutely right, buy 5% down. But if it goes higher than that, I'm sorry, you just didn't get it in, and you have to wait. It's kind of like a bus. You've got to get another bus because you're off of that one. You take your profit. We're not going to start buying above our basis because it demonstrates a lack of discipline.

Now, let's go to one of your mad mentions. This tweet is from Tony C. Actually, I think it's Tony C's dog, who says, quote, You're awesome, Mr. Booyah. Thank you. Keep making my pops money so he can buy me more pepperonis. Love those things. I once ate pepperonis on the set and I got violently sick. I thought it was hilarious. It turns out that they're not for people. They're for Tony C. All right.

Now, let's go to Matthew now, who asks, could you address the issue of balancing the individual ownership of mega cap stocks that are already represented so heavily in the S&P 500 that I have as a core holding? Should I consider the index funds as really owning a certain amount of these names already? No. I tell you, there's a lot of people who think like that. They say, oh, well, they swing. The index fund swings with those stocks. It doesn't. And those are fungible. They can trade. Just put one side in.

is indexed and the other side is individual stocks. And I'm telling you, that's the way to go. All right. I want to go to another mad mention. Mr. BWR says, quote, enjoying the garden tweets. You still need a podcast, YouTube channel or your own show on gardening. And quote, I put my garden together this week, this year, and I actually decided to cut the tomato plants in half. And here's why. I

I felt that they were producing, they were fighting each other. It was combat and they were not producing my harvest until September, which made it therefore so I could not jar, put in a can as many as I'd like. Now I spread them out a little. I'm going to have to write a book about it. Let's go to Larry in the US who says, my question concerns PE ratios. When I'm researching a stock, I'll naturally look at the PE ratio, but different sources say different things.

CMC will have one answer, but E-Trade will have a different one, sometimes radically so. Sometimes it'll even say 0-0. How can I find the truth? Okay, P.E. multiples, I'm just going to tell you, point out, perplexity has the best analysis of P.E. multiples. That's the one you got to go to. I know people love ChatGPT. I am telling you, I've been using it for P.E. multiples, and you got to go to perplexity. I take no money from perplexity. I just use it. Now let's go to Ken in Maryland.

who says, please explain the significance of moving averages. What we do off the charts, what a moving average does is try to help you project where a stock will go by looking at where a stock has come from. I like them. I don't live by them. Now let's go to Brad in New York who asks, when it comes to investing, you suggest our first 10,000 in an S&P index fund, S&P 500, then start to invest in stocks. But like the stocks that run, should we ever trim our foundational S&P funds to rebuy at lower levels? All right, no.

Okay, let me just go over this whole concept of the S&P. I am not a big believer that you have to own the mediocrity. I regard the S&P 500 as mediocrity. It's no longer the way it was. It was before we had chat GPT and the different bots. We couldn't find all the information we wanted. We came up with the S&P index fund because a lot of people felt that you were not smart enough to buy individual stocks. All

All of that has changed, but no one in the industry except for moi has changed with it. So my answer is just do individual stocks after you've built the index fund so we don't have to worry about diversification. The index fund gives us the freedom to choose stocks that you and I think are great. Now, I'll tell you this. If you buy five stocks, one or two of those stocks is likely to make you rich. And I know that the index fund will not do that.

Hence why I write this. And when you come and when you buy my book later this year, you're going to see I flesh this out over 100 pages and you will realize that the new world does not include any more index fund than half of your money. Not all of it. I like to say there's always a market somewhere and I promise to find it just for you right here on Mad Money. I'm Jim Cramer. And yes, I'll see you next time.

All opinions expressed by Jim Cramer on this podcast are solely Cramer's opinions and do not reflect the opinions of CNBC, NBCUniversal, or their parent company or affiliates, and may have been previously disseminated by Cramer on television, radio, internet, or another medium.

You should not treat any opinion expressed by Jim Cramer as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Cramer's opinions are based upon information he considers reliable, but neither CNBC nor its affiliates and or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. To view the full Mad Money Disclaimer, please visit cnbc.com forward slash madmoneydisclaimer.

Trading at Schwab is now powered by Ameritrade, unlocking the power of Thinkorswim, the award-winning trading platforms loaded with features that let you dive deeper into the market. Visualize your trades in a new light on Thinkorswim desktop with robust charting and analysis tools, all while you uncover new opportunities with up-to-the-minute market news and insights. Thinkorswim is available on desktop, web, and mobile to meet you where you are. It's built by the trading obsessed to help you trade brilliantly.

Learn more at Schwab.com slash trading.