Jim Cramer says history offers a playbook for navigating a Fed rate-hiking cycle

CNBC's Jim Cramer on Thursday walked investors through how to navigate a potential interest rate hiking cycle.

The Federal Reserve raised its benchmark rate by a quarter percentage point Wednesday to a range of 3.75% to 4%, its first increase in three years. During his post-meeting news conference, Fed Chairman Kevin Warsh said that "inflation is too high and has been for too long," and that Wednesday's rate increase would support a quicker return to the central bank's 2% inflation target.

Cramer said investors' concern is that Wednesday's move could mark the beginning of a broader tightening cycle, which has historically created near-term pressure on stocks.

"If history's any guide, these rate hikes could be with us for a while," Cramer said. "Just remember that, while it tends to be bad news for the stock market in the short term, anything that helps us beat inflation is good news for the long term."

Citing a note from Jim Reid, Deutsche Bank's head of macro research, Cramer said the previous 14 rate-hiking cycles lasted an average of 22 months and a median of 15 months. But recessions have typically taken much longer to arrive, averaging 42 months from the first hike to the next downturn, and sometimes don't materialize at all.

That means investors shouldn't necessarily treat the first rate hike as a signal to abandon stocks. Instead, Cramer said history shows the importance of becoming more selective and being prepared for market leadership to change as the cycle progresses.

During the last tightening cycle, which began in March 2022, defensive sectors, including utilities, consumer staples and healthcare, held up relatively well in the first six months, while technology was among the worst performers.

But that leadership eventually flipped. Over the full hiking cycle through July 2023, technology went from one of the biggest laggards to one of the strongest sectors as the Magnificent Seven took off.

"Even if you want to avoid tech after the start of a rate-hike cycle, don't stay too bearish on the sector for too long, because it tends to bounce back," Cramer said.

The 2015-2018 tightening cycle tells a similar story. Utilities, consumer staples and real estate initially outperformed following the Fed's first hike in December 2015, but technology ultimately led over the full cycle through December 2018.

Cramer cautioned that every cycle is different. This time, triple-digit oil prices stemming from the war in the Middle East are adding to inflationary pressure. A decline in crude could ease that pressure and potentially reduce the need for additional hikes.

For investors, the takeaway is to remain cautious without assuming the entire market will struggle for as long as the Fed is raising rates.

"If you buy stocks when the Fed's tightening, it means you're trying to fight the Fed, and that's usually a good way to lose money unless you're being selective about what you own," Cramer said.

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