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Cramer: Best stocks to pick as the Fed tightens

Cramer: Stock picks for Fed tightening

At this point of the year, Jim Cramer knows the U.S. has a one-way ticket to a low-growth economy. Either the economy will be too weak for the Fed to raise interest rates or the Fed will raise interest rates in order to create a low-growth environment.

Either way, there is no avoiding low growth. So what if the Fed does raise interest rates? Cramer spelled out what this could mean for your portfolio.

"Welcome to the world of intense rotations, which have already begun since the Fed signaled in 2014 that things were getting too good to stay accommodative," the "Mad Money" host said.

If this were the old days, Cramer would recommend investors go for industrial stocks because their earnings will improve as the economy improves. However, that is no longer possible as most big industrial companies have become too dependent on overseas earnings, and a stronger dollar will create challenges as cash floods into the U.S. and away from countries across the ocean.

Cramer also warned investors need to start to be careful when reaching for trades that have always worked in the past. In addition to skepticism about the industrials, that also means investors must be careful when buying large tech companies that have exposure to Europe. (Tweet This)

A worker making parts for commercial coffee grinding equipment at the Modern Process Equipment manufacturing facility in Chicago.
Tim Boyle | Bloomberg | Getty Images

One group that always benefits from higher interest rates are the bank stocks because higher interest rates mean they earn more money from cash deposited. But what else will work besides the banks?

Cramer said companies that have the biggest year-over-year earnings revisions, such as the U.S. industrials that do not have a lot of overseas business, are a good bet as are the high-growth stocks that aren't dependent on economic growth to do well, but can get a boost from the economy doing well. He also recommended restaurant and retail stocks that have already benefited from growth.

"Now these gains will be in fits and starts and will always be called into question from now on as the Fed tightens. But history is on the bulls' side in the early rounds of tightening, as they tend not to cool off the economy drastically even as many will fear they will," Cramer said.

Here's what it boils down to:

Cramer anticipates there will be various three-day selloffs whenever a new piece of news comes out about a rate hike. On day one, all stocks will go down in a broad market selloff that is led by hedge funds and mutual funds that short the .

In the old days, Cramer used to buy bond market equivalent stocks on day two—that should no longer be the case. Instead, Cramer foresees money will gravitate to the bank stocks and the highest growth stocks that have earnings that will go higher on interest rates.

Higher rates also mean housing stocks will get hit because mortgage money will cost more. That means homebuilders will have to hope for high employment rates, and that banks will ease terms to lend money. (Tweet This)

People also tend to buy gold when interest rates go higher, because it will retain its purchasing power when inflation is higher. Thus, if investors think inflation is imminent, they will all flock to gold.

"There is one issue with gold that you might want to keep in mind. Gold's been in a bear market so long that many of the producers who thought gold would grow to the skies do not have the money to continue to find gold," Cramer added.

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With this in mind, Cramer recommended the only exception to this is Randgold, or to buy the gold ETF called GLD, or gold bullion itself. But don't worry—Cramer doesn't see any inflation on the horizon yet, so there is no rush to buy gold.

Ultimately if rates go up, Cramer says investors should move towards more economically sensitive stocks. However, it is important to recognize many international stocks may not do well because of overseas exposure and a strong dollar. In that case, gold could become the go-to play on inflation.

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