Too many investors are expecting history to repeat itself in the worst ways possible, Jim Cramer said Monday on CNBC's "Mad Money." On another tough day on Wall Street, when U.S. stocks struggled through a choppy trading session, the Dow Jones ended down 17 points at 12,101, the Nasdaq saw a fractional gain of 0.46 percent to close at 2,760 and the S&P 500 edged up 0.01 percent at 1,278.
Since so many are fearing that the worst may soon become realized — on the heels of Friday's dismal jobs report and continuing unease in Europe — Cramer decided to break down the two possible worst-case scenarios he thinks the U.S. could face in 2012. He also noted that investors would face neither situation if Germany began to "compromise with the have-nots" and worked to dig other nations in the euro zone out of their debt.
First possible scenario: The U.S. stock market crashes down to levels that match the lows of 2011. Last year, the Dow Jones grazed the 10,655 mark after selling off in August to 10,719 — that decline would be over 10 percent lower from current levels, and would be the same in the case of the S&P. Cramer painted the arguments both for and against this scenario.
Europe is in worse shape now than it was in the summer and early fall 2011, and the major emerging markets that were once the global engines of growth in this economy — China, India and Brazil — have suddenly cooled. Technically speaking, last week the Dow fell below its 200-day moving average and the ongoing gridlock in Washington has shown no signs of letting up. Positions have hardened, Cramer said, and the U.S. is closer to a fiscal cliff, which means a fading stimulus and rising taxes. And of course, there's the jobs number — still trending above 2011 but starting to falter in a big way.
Why might all this not be the case? Low interest rates are still making stocks more attractive than bonds, Cramer said — with the 10-year Treasury notesyielding 1.5 percent and Dow yielding roughly 2.7 percent. The U.S. housing market has stabilized, whereas last year it was still "free fall." Stronger auto sales, solid corporate profits and lower commodity costs are also giving the markets a boost.
Second possible scenario: U.S. stocks plummet down to levels matching the catastrophic lows of 2009. Back then, the Dow fell to 6,500 and the S&P spiraled down to 676 — that would mark a 50 percent decline from where the averages are now. Again, Cramer mapped out both sides of the story.
European bank failures and a faltering Spain and Italy make scenario two an unlikely possibility. The Fed "seems to be out of ammo," he said. "Easingain't cutting it anymore." And with things slowing down in the EMs, the U.S. won't have China, India and Brazil to turn to this time around. But once again, Cramer a few key bright spots — credit is strengthening, mortgage rates are at all-time lows and dividend yields are coming back, he said. Since bottoming out, the Dow has seen 27 of 30 stocks raise their dividends and bolster their balance sheets.
So, what's the worst-case scenario Cramer sees happening? "I think it's below the levels where we bottomed last year, which would imply a more than 10 percent decline," he said. "But nowhere near the almost-50 percent decline of 2008 and 2009."
The bottom line: If a resolution doesn't pan out in Europe, and Spain and Italy collapse, the markets may dip below the lows of 2011. But a return to the worst levels of 2008 would be highly unlikely, he said. "Too much that's better, including our banks, our balance sheets, and most of all our dividends, which will keep us from getting anywhere near those depths."
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