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Cramer: Planning for the worst with China

There was very little historical evidence for investors to go on when they navigated the market chaos on Thursday. Jim Cramer wished there were more analogues and patterns to look back on, because it can be helpful in times of turmoil.

"Right now we know the proximate cause behind the decline in our markets is China, more specifically the Chinese yuan devaluation and the breakdown of the Chinese stock market," the "Mad Money" host said.

Cramer thinks it is very likely that the Chinese market will open down 7 percent on Friday, which means that investors can expect the Shanghai composite to open at 2,900 Thursday night. That will take out its Aug. 26, 2015, low of 2,927.

So what does that mean for U.S. investors?





"Maybe we all need to take a deep breath and remember — newsflash — that we live in the United States. Not the People's Republic of China." -Jim Cramer

In order to answer this question, Cramer looked at what occurred on Aug. 24, 2015, when the U.S. market previously bottomed due to Chinese turmoil. However, it is important to note that things have changed since then. According to the Federal Reserve, the economy has become stronger. Additionally, there has been a major commodity collapse with crude closing at $33 Thursday.

"Both of these points suggest that companies focused on the consumer should be doing better, and companies involved in international exports might have stronger bottom lines than we think, even as it is possible that China could be hurting anyone doing business there," Cramer said.

Looking at the 30 stocks within the Dow Jones industrial average, the first thing Cramer noticed was that only five stocks are currently below where they traded back in that late August bottom: Apple, American Express, Caterpillar, Goldman Sachs and IBM. With exception of Goldman, these declines made sense.

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Ultimately, when Cramer compared the individual Dow components to where they were the last time the Shanghai composite tanked, he got a pretty mixed picture from a bottom-up perspective.

However, Cramer changed his point of view to look at things from a top-down perspective instead.

The worst case, assuming the Chinese government does not prop up its stock market like it did in August, could lead to two scenarios:

The first is an October 1987 situation, when the Dow plunged to 1,400 from 2,700 in a couple of weeks — but nothing happened to the U.S. economy.

The next scenario is that China could be facing a Nasdaq 2000 scenario, which seemed more likely to Cramer. If the Shanghai composite falls 7 percent Thursday night, that will take it to 2,900. Based on what happened to Nasdaq in 2000, Cramer estimates that there is another 850 points of downside left.

"If that is the case, what happens to China's economy? I think very little. The Chinese market just isn't big enough, not even at $6 trillion, to do much damage," Cramer said.

So regardless of how bad things get in China, Cramer reminded investors that in both 1987 and in 2000 market crashes, the damage to the U.S. economy was not so bad. And those crashes actually happened on U.S. soil.

"So, maybe we all need to take a deep breath and remember — newsflash — that we live in the United States. Not the People's Republic of China," Cramer said.

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