As Treasury yields continue climbing, the stock market seems to be taking a break. But according to CNBC’s Jim Cramer, this pullback in stocks could represent an opportunity for investors.
In a recent “Mad Money” segment, Cramer explained why rising Treasury yields have been causing problems for stocks.
“Why own stocks when you can make north of 4.5% risk-free from the 10-year? Ten-year Treasuries are like a great dividend stock that’s guaranteed not to lose money over the next decade,” he said.
At the same time, financing costs for people using credit cards or purchasing cars have surged, which Cramer finds concerning. He also sees a potential decline in corporate profits, given that interest rates are “a huge part of the cost of doing business.”
The Federal Reserve has implemented aggressive interest rate hikes to tame rampant inflation. In August, the U.S. consumer price index rose by 3.7% from a year ago. While this headline inflation rate has come down from its 40-year high of 9.1% last June, the prices of many necessities like food and shelter remain elevated.
Cramer says that if the Fed wins the war against inflation, it would bring more buyers into the Treasury market. And given the inverse relationship between bond prices and yields, this influx would drive yields down. Consequently, money might flow back into the stock market.
However, even if inflation stays elevated, Cramer still sees plenty of reasons to own stocks. Here’s a look at three notable ones.
Reason No. 1
Cramer points out that there have been times in history when interest rates were soaring, yet investors still made money in the stock market. He cited the 1980s and 1990s as examples but noted that even today, companies can flourish despite challenging rate environments.
He also reflected on his success, achieved by bucking conventional wisdom and going against the crowd.
“I remember I was running money myself, I killed it buying stocks when everyone else was running away from them in both periods like now. Buying anything seemed crazy when I bought them but it was the right call,” he said.
Reason No. 2
According to Cramer, many stocks have declined more than they should in comparison to Treasury yields. For certain companies, that means it’s time to scoop them up at a bargain.
“If a company can still make money in a higher rate environment, then maybe you need to buy the stock right here,” he said, adding that “capitulation breeds buying opportunities.”
With the right stocks, being a contrarian can pay off handsomely. After all, legendary investor Warren Buffett said, “Be fearful when others are greedy, and be greedy when others are fearful.”
Reason No. 3
The third reason has to do with your investment objective. Cramer says that for some people, the yield from Treasuries — even if the 10-year note reaches 5% — won’t cut it.
He recounted how Nvidia Corp. Founder Jensen Huang started his company in a Denny’s restaurant and how Nvidia now boasts a market capitalization of $1 trillion.
“I don’t want to find more 10-years. I want to find you more Nvidias,” he said.
It’s the upside potential that makes stocks attractive. As Cramer put it, “You buy stocks when you’re trying to get rich; you buy Treasuries to stay rich.”
Don’t miss real-time alerts on your stocks – join Benzinga Pro for free! Try the tool that will help you invest smarter, faster, and better.
This article ‘Capitulation Breeds Buying Opportunities’: Jim Cramer Says He ‘Killed It’ Buying Stocks When Others Fled — And Now He Sees Plenty Of Reasons To Own Them originally appeared on Benzinga.com
© 2023 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.