Here’s how we navigate the ups and downs
Here’s our Club Mailbag email address: sendingclubmailbag@cnbc.com — send your questions directly to Jim Cramer and his team of analysts. We cannot offer personal investment advice. We will only address more general questions about the investment process or stocks in the portfolio or related sectors. This week’s question: I’m a fairly new member of the club but I found your feedback great. My question is: As the S&P 500 continues its rise, are you expecting a bubble burst or a pullback? Economic indicators are not very good, but the market seems to be gaining momentum, which could be a bad combination. — Jim We avoid making big decisions about the direction of the market. There will be corrections, but their timing and duration are almost impossible to predict. We don’t pretend to have a crystal ball. Nobody does. Instead, our investment decisions are driven primarily by the fundamentals of the companies we own and the valuations the market assigns to them. Our job is to find great long-term stories and buy when stock prices appear undervalued, not try to determine when others will start buying. We’re focusing on investing in the right companies over the next six to nine months and beyond. We are always investing. Market movements A correction is defined by a decline of 10% or more from all-time highs. A bear market is measured by a decline of 20% or more from record highs. This doesn’t mean that fundamental investors should be ostriches who bury their heads and avoid the big picture and market trends. Instead, investors should always be prepared by understanding that corrections and even bear markets are inevitable. This starts and ends with our cash stake, ensuring we have enough on hand to take advantage of buying and selling opportunities depending on which way the market moves. If the market is hot or the environment is bad, we will increase cash levels. If there is a recession in the market or we are expecting good news, we try to find some money to work with. This is not about expectation, but about disciplined investing characterized by booking profits and opportunistically reducing the cost base, recognizing that the risk/reward profile changes with every move up or down. Jim has been using the Short Range S&P Oscillator to help navigate these turbulent waters for decades. Every time we mention the oscillator, we are met with requests from Club members: “How can we access it?” We went straight to the source, our partners at MarketEdge, the data provider that publishes the Oscillator. We’re excited to share that club members can now receive a special discount on this helpful tool. Click here . Let’s look at the stock market over a 30-year period to show why we are long-term investors who aim to buy low and sell high. Our goal here is to zoom out and get a real feel for how long these painful withdrawals have to be tolerated. The past does not promise the same thing in the future. However, except for Black Swan events like the dot-com bubble bursting in the early 2000s or the 2008 financial crisis, history often rhymes. In this chart of the State Street SPDR S&P 500 Trust ETF, often referred to by the symbol SPY, we see periods of pain but an upward trajectory over time. Letters in the table represent the approximate time to full recovery for the events listed here. A. Dotcom crash: It took about seven years to return to pre-crisis levels. Of course, we walked straight into the financial crisis and the Great Recession. B. Financial crisis: It took less than six years to return to pre-crisis highs. C. China growth scare, Greek debt default, and the end of quantitative easing: After a combination of these events, the recovery took about a year. D. 2018 Contraction Rage: It took nearly six months to recover from the fallout from then-Federal Reserve Chairman Jerome Powell’s hawkish comments. E. Covid outbreak: It was one of the most volatile markets in history. But he has also survived some incredible losses in about six months. F. 2022 inflation and aggressive interest rate hikes: The lasting effects of Covid-induced supply chain disruption have caught up with the market and sparked the biggest inflation crisis in 40 years. This catalyzed the Fed’s most aggressive rate hike cycle ever and a bear market. However, it returned to 2021 levels by the end of 2023. G. Trump’s 2025 tariff announcement: The market rebounded from this sharp decline in about six months and hasn’t looked back since. We need to be prepared for a decline of approximately 2.5 years on average over the past quarter century. If you eliminate the dotcom crash or financial crisis, the average time it takes to get from a peak to a trough and back to its previous high drops to 1.8 years, or about 22 months. Another important takeaway is the time it takes for each market to reach its bottom. Understanding the duration of market declines helps you determine how much risk you are willing to tolerate. An investor in his 20s with decades of work ahead of him is likely to survive even the worst market downturn, while someone six months away from retirement may want to play more conservatively. A. Dotcom crash: 2¼ years to reach the bottom B. Financial crisis: 1½ years C. China’s growth scare, Greek debt default and end of quantitative easing: 8 months D. 2018 Taper Rage: 3 months E. Covid outbreak: 2 months F. 2022 inflation and aggressive interest rate hikes: 10 months G. Trump’s 2025 tariff announcement: 2 months Conclusion: Expect a downturn, prepare to buy as high-quality companies become cheaper and stay disciplined. As famous investor Peter Lynch once said: “Investors who prepared for corrections or tried to anticipate corrections lost far more money than was lost in corrections.” (See here for a complete list of INJim Cramer’s Charitable Trust stocks.) When you subscribe to the CNBC Investment Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
