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Americans are running out of cash

“There’s still plenty of money on the sidelines that might come into the stock market,” Cramer said on the show.

However, he might have missed a recent analysis from JP Morgan that suggests household excess savings from the pandemic era could run out by October this year.

Meanwhile, the Federal Reserve (and other central banks) may be considering a drain of cash out of the banking system. These institutions have flooded the system with excess cash over the past decade. They now need to pull cash out to deal with inflation.

That could drag the market lower in the months ahead, or at least hinder a strong rally in stocks.

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Inflation is still sticky

Like an annoying guest that has overstayed its welcome, inflation simply doesn’t want to leave. The core consumer price index was up 5.3% year-over-year in May — though the 4% overall rise year-over-year shows inflation has been cut by more than half.

That said, the core CPI is a key measure of the economy because these items aren’t as volatile as food or energy and should be much slower to react to changes in interest rates or consumer sentiment. The core rate remains far higher than the Fed’s 2% target, which means the central bank could be compelled to keep rates more elevated than previously expected. Fed Chair Jerome Powell has signaled that more rate hikes are likely on the way.

That’s not good for stocks. If investors can extract 4.75% from a U.S. bond, why would a stock be appealing? By comparison, the average S&P 500 stock offers a 1.5% dividend yield and a 4% earnings yield. Bear in mind that stocks carry significantly more risk than a government bond, so you effectively get paid less to take on more risk.

Commercial real estate is still concerning

Higher interest rates also make leveraged real estate less appealing. Commercial landlords who own office buildings and malls worldwide worry about the looming recession and the work-from-home trend. They also owe $1.5 trillion in commercial debt expected to come due over the next three years. If interest rates remain high during that period, commercial landlords will have to refinance their debt at higher rates while — you guessed it — their net income is lower.

It’s an issue that could spill into other parts of the economy.

Given Jim Cramer’s mixed record as a stock picker, it remains to be seen these next few months whether Cramerica should treat him as a pundit to celebrate, or just another loud celebrity.

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About the Author

Vishesh Raisinghani

Vishesh Raisinghani

Freelance Writer

Vishesh Raisinghani is a freelance contributor at MoneyWise. He has been writing about financial markets and economics since 2014 - having covered family offices, private equity, real estate, cryptocurrencies, and tech stocks over that period. His work has appeared in Seeking Alpha, Motley Fool Canada, Motley Fool UK, Mergers & Acquisitions, National Post, Financial Post, and Yahoo Canada.

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