CNBC’s Jim Cramer on Tuesday suggested investors take advantage of the recent market upside to sell some stock and build up some cash for the next dip.
“Without a V-shaped recovery, you have to be skeptical of these big moves higher,” the “Mad Money” host said. “Because in a U-shaped recovery I’m expecting, the stock market will pull back again and that is when you can put some money to work.”
A V-shaped recovery happens when a quick decline in economic activity is met by an abrupt rebound in activity, while a U-shaped recovery is one where the economy gradually climbs out of a recession environment, which can take up to two years.
The major indexes all rose as much as 4% to their peak in Tuesday’s session, but they all gave up their losses in the afternoon as investors digested the latest developments in the coronavirus pandemic. The Dow Jones ultimately dipped 26 points, or 0.12%, to 22,653.86, the S&P 500 slipped 0.16% to 2,659.41 and the Nasdaq Composite shed 0.33% to 7,887.26 at the close.
Based on Monday’s 7% market rally, investors are hoping that the economy has a V-shaped recovery, Cramer said, which is where business activity snaps back if the ongoing outbreak is quelled soon.
“‘V’ is what justifies yesterday’s rally” but “I do not believe in the ‘V’ when it comes to this recovery,” he said.
He gave three reasons:
- There’s no effective way to treat or prevent COVID-19.
- Asymptomatic individuals are capable of still spreading the virus.
- While the curve of new infections appears to be flattening, it only takes the worst-case scenario off the table.
Despite the federal government’s programs to inject more money into the economy with bailouts, small business funding and stimulus checks to citizens, “we won’t be able to have a real recovery until we beat the virus,” Cramer said.
“[T]here’s no economic solution to a pandemic that’s biological. You can’t just snap your fingers and make those customers come back,” he said. “That’s why I don’t believe we can have that V-shaped recovery. There’s too much fear.”
“If we get the pandemic contained gradually, the economy will bounce back gradually,” he added.
Talk of what kind of economic recovery the U.S. may experience has picked up around Wall Street circles. Those foreseeing a ‘V’ recovery are banking on the strength of the U.S. economy prior to the government-ordered shutdowns to return.
Former Federal Reserve Chair Janet Yellen told CNBC on Monday she thinks “a ‘V’ is possible,” but it depends on “how much damage is done” during the stay-at-home mandates.
About 10 million Americans filed for jobless claims in the last two weeks and the March labor report showed payrolls fell by 701,000 that month.
“The more damage of that sort is done, the more likely we are to see a ‘U,’ and there are worse letters, like ‘L,’ and I hope we don’t see something like that,” Yellen said.
Former Federal Reserve governor Daniel Tarullo also said in a CNBC interview last week that the jobs market could weigh on a rapid recovery.
“When you see numbers that are of that order of magnitude it becomes clear just how steep a decline we are suffering right now and there’s really no precedent for thinking about this,” Tarullo said. “The prospect of the “V” shaped motion here — with going down rapidly and going up rapidly — may unfortunately not turn out to be what we see and instead we will face a much tougher road.”