When the Federal Reserve is tightening — steadily raising interest rates in order to combat inflation — worries about a Fed-mandated economic slowdown can drive stocks into a sell-off, CNBC's Jim Cramer says.
When that happens, the market takes on a new form as stocks begin to factor in the possibility of rate hikes, so investors would be wise to stay nimble, he suggested.
"Garden-variety pullbacks can be gamed, as long as there's no systemic risk. But sell-offs in the wake of the Fed raising rates? Those are trickier," the "Mad Money" host said.
A common mistake Cramer sees in these situations is investors flocking to stocks with large dividends — typically consumer goods stocks or other "safe" plays investors buy in times of recession.
But those stocks can "spring back" when the Fed is tightening as bond yields, which are correlated with the central bank's hikes, start to become more competitive with stocks, Cramer warned. Instead, he suggsted going for "accidental high-yielders," or stocks of high-quality companies that have declined so much that their dividends start to offer very attractive returns.
"[Fed-related declines] can lead to decent opportunities as long as you stay away from the high-yielders that become less attractive when the Fed tightens and stick with the accidentally high-yielders that might just give you that delicious bounce when the Fed is done tightening," he said.
Stocks endured another bout of volatility Friday, with the Dow Jones Industrial Average losing nearly 300 points, the Nasdaq Composite dropping 2.1 percent and the S&P 500 briefly entering correction territory — 10 percent down from its record highs from September.