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Jim Cramer gave investors a reality check. He warned to never, ever, confuse the day-to-day actions of the stock market with the state of the real economy. As many saw in the horrendous decline on Monday, the market and the economy can vary drastically.
Cramer has survived eight separate crashes and countless bear markets in his investing lifetime. And he has always dreamed of the day that interest rates would be low, corporate balance sheets are strong, commodity costs are on the decline and employment is better.
So, if everything is so great, why the heck did the market go down on Monday? Cramer spelled it out.
The first issue is the indecisive leaders in the Federal Reserve. For example, St. Louis Federal Reserve President James Bullard made it clear on Friday that higher rates are definitely on the agenda of the Fed and said he is sanguine about everything that is happening right now.
The second issue is the damage that China has inflicted on the global economy. One year ago, the Shanghai Composite was at 2,200. On June 12 of this year it traded at 5,178. That is completely absurd to Cramer.
It is even more inconceivable that the Shanghai Composite has not repealed its entire gain, as it was built on tremendous account growth and loose requirements about borrowing on margin.
So, what should investors do?
Cramer recommended for those with cash on the sidelines for retirement, that it is a good idea to start investing that capital into the stock market. Do not invest all at once, though.
Looking back, this decline makes perfect sense to Cramer, even though it doesn't compute when looking at the real U.S. economy.
Cramer has heard many investors speculate that the selloff on Monday is reminiscent of the selloff that occurred between 2007 and 2009. He finds that preposterous, as that crash was all about systematic risk to the U.S. banking system. What ails the stock market these days is coming from overseas, not systematic risk in the U.S. economy.
"Anyone who says this is 2008 all over again is out of their mind," Cramer added. (Tweet This)
Cramer is also dismissive of anyone who claims that the decline can go another 25 percent down after a day like Monday. That kind of a correction points to genuine systematic risk, and Cramer does not agree that is what has occurred.
The "Mad Money" host finds this situation most relevant because back then it signaled a potential Great Depression in Europe, U.S. banks were still reeling from what happened in the Great Recession and the job market was not yet robust.
If Monday's selloff is indeed reminiscent of 2011, then Cramer expects the market to go down another 6 to 7 percent from here. That means investors will need to get back into the market quickly, and that doesn't seem realistic to Cramer to be so nimble.
"To me, that says stay the course unless you're fully invested or on margin, in which case you should do some selling," Cramer said.(Tweet This)
But just because the market declined on Monday, doesn't mean there aren't bargains floating around. However, Cramer warned that there are a host of bear markets out there that might seem cheap but could be treacherous.
The bad news bear groups include natural resources, technology and many international companies. Cramer suggested investors not go anywhere near those groups.
"Some gains have to be missed because they're just too risky. Fortunately, there are enough solid choices from these groups to start some positions that make sense here," Cramer said. (Tweet This)
Cramer's No. 1 concern right now is being able to put money to work to buy stocks of companies that investors like, at prices they like. Meaning, he's not concerned with an instant profit.
However if you are an investor who does not have the time or inclination to pick an individual stock, then Cramer recommended to buy a dividend-oriented mutual fund or ETF with higher yielding characteristics.
And for those investors who do not have the time or inclination to look for those funds, then Cramer recommended a plain old S&P 500 index fund.
But do not put all of your money to work at once. Cramer recommended that only a quarter should be invested right now for investors who are sitting on cash. Wait and see what the market does first. (Tweet This)
For the investors are interested in picking individual stocks, Cramer thinks a diversified portfolio with growth, dividends, domestic securities and one hyper-growth stock could be the right balance.
After Monday's rollercoaster of a decline Cramer saw many of the fastest growing stocks out there, like Disney and Google, were torn to shreds.
That is why Cramer took the time to explain the difficulties of owning a turbo-charged growth stock in a bear market. He used Wayfair as an example, the once red-hot home furnishings retailer that is still up for the year despite Monday's collapse.
Wayfair recently reported the best quarter of any growth stock that Cramer follows, sending the stock soaring 28 percent. But since then, the stock has fallen off a cliff, dropping to $41 on Monday from $53 the day it reported.
Ultimately, if Wayfair can report the best quarter out of any growth name in 2015 and still lose 22 percent of its value in a little more than a week, then it makes Cramer worry about how every other stock in the group will hold up.
"It's a huge and glaring reminder that nobody ever got hurt taking a profit," Cramer said.
However Cramer wonders if he is being too optimistic that he thinks the best thing for investors to do amid the market selloff is to simply stay the course.
Cramer thinks that the market is closer to the bottom than many would believe, but Mark Sebastian does not agree. Sebastian, the founder of OptionPit.com and colleague of Cramer's at RealMoney.com, thinks you should be very scared.
The volatility index is also known as the VIX, or fear gauge, because it is often used to measure the overall level of terror in the stock market.
Sebastian is worried because of the waving red flags he is seeing in the VIX; he thinks many professional VIX watchers are underestimating the danger since the VIX has been so placid in the past three years.
The main concern is something called recency bias, where people assume that trends from the recent past are permanent and will continue into the future.
Ultimately, Sebastian believes that this selloff is not like the other declines that the market has seen in recent years—he believes that it has the potential to be worse.
"As for me, I think that view is too negative. I'm much more sanguine than Sebastian, but I wouldn't be doing my job if I didn't bring his cautionary tale to your attention and I respect his work enough that I'm not saying to buy with both feet," Cramer added.
In the Lightning Round, Cramer gave his take on a few caller-favorite stocks:
Icahn Enterprises: "This is a tough one because they've got a lot of stocks that I don't really care for, but I really care for Carl Icahn. It has a 9 percent yield but it's down 30 percent. I think it's okay. It's kind of a mutual fund of stuff that I'm not that crazy about, but I sure am crazy about the man who is the chairman."
Sysco Foods: "I like the fact that Nelson Peltz's people have joined the board. The problem is the stock has just had a very big run after the U.S. Food deal fell apart. It yields 3 percent. I would leg into this one, not aggressive, but it is good that Trian is on the board."