Key insights
- Jim Cramer believes the stock market's rally is unsustainable without lower interest rates. Higher-than-expected CPI data is pushing Treasury yields up, reducing expectations for Fed rate cuts. Rising oil prices due to geopolitical tensions are exacerbating inflationary pressures, impacting sectors like housing. Cramer's investment in Home Depot, based on anticipated rate cuts, has backfired, highlighting the challenges for rate-sensitive stocks.
CNBC's Jim Cramer said Tuesday stocks may struggle to sustain their recent gains unless the bond market cooperates.
"This stock market won't be able to rally for long without the oxygen of lower interest rates," the "Mad Money" host said.
The consumer price index came in hotter than expected Tuesday, with prices rising a seasonally adjusted 0.6% in April, pushing the annual inflation rate to 3.8%. The report sent Treasury yields higher, with the 2-year yield briefly touching 4% as investors dialed back expectations for future Federal Reserve rate cuts. Hotter inflation makes it harder for the Fed to cut rates because policymakers typically keep borrowing costs elevated to prevent prices from rising too quickly.
While Tuesday's rotation into previously beaten-down sectors like healthcare was encouraging, Cramer said lasting gains will be difficult without lower rates.
"Without the bond market on your side, you might just be up on a trade," he said.
Cramer argued inflation pressures tied to the Iran war are beginning to ripple through the economy and could further delay hopes for lower rates. Rising oil prices, he said, are pushing up costs across categories including shelter, services, food, apparel, and gasoline.
"You have to recognize that the war's doing something even the tariffs couldn't do: raising prices across the board for the average American," he said.
He pointed to Home Depot to show how higher rates were already weighing on stocks that rely on cheaper borrowing costs. Cramer noted that he purchased Home Deport for the Charitable Trust, the portfolio used by the CNBC Investing Club, on a belief eventual rate cuts would support housing-related demand and lift the stock. Home Depot on Tuesday traded at its lowest levels since November 2023.
"The hedge has backfired," he said.
Ultimately, Cramer said the hotter inflation report is narrowing investors' opportunities and making it increasingly difficult for stocks to sustain their rally without relief from lower borrowing costs.
"When you get this kind of inflation, it really cuts back on your opportunities," he said.
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