China can hurt the markets, and oil prices have become so low that there is a severe amount of stress in the credit market. But Jim Cramer thinks there is something bigger that triggered the sell-off on Friday.
“Don’t kid yourself about what this sell-off is really about. It is about a recession, the potential for a recession and what it will mean for corporate profits,” the “Mad Money” host said.
The backdrop of the market has become much more negative since December. Ever since the Fed began tightening, there has been a spike in the dollar, a slowdown in consumer spending, a breakdown in theChinese market and horrendous action for high-yield bonds.
While not all of these issues are directly related to the Fed, what the Fed does or doesn’t do creates the backdrop from which stocks react.
Cramer has changed his posture to be more defensive ever since the Fed tightened. That is because he has learned over the years never to fight the Fed and never fight the tape. Cramer knows when the market is determined to go down that is when you are fighting the tape.
In all other downturns since the Great Recession, the Fed was on the side of investors and did not want to hurt a recovery. Friday’s sell-off was unique from those previous routs because the Fed has changed its position and decoded to tighten.
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Cramer had first-hand experience of trying to fight the Fed in 1998. That is when he haplessly bought a stock right into Fed tightening, and then had to get rid of it just to save his hedge fund.
In the middle of the selling, the Fed realized it was wrong and called an emergency meeting to stop the rate hikes because they feared the U.S. was going into a recession. The market has rallied like crazy ever since and has not looked back.
“That is not happening now. You are fighting the Fed big time and if the Fed isn’t careful, 2016 will mark a return to a recession,” Cramer said.
These fears of a recession are what Cramer attributed as the over-arching reason for the sell-off. And if the Fed continues its current course — that is exactly what will happen.