It doesn't hurt that investors shave off some positions in their portfolios, but it's a "big mistake" to dump everything, CNBC's Jim Cramer said Wednesday.
"This market is now largely ruled by fear. I don't like being scared into anything when it comes to my money or yours, and remember: panic is not a strategy," the "Mad Money" host said. "You don't panic when the economy's hanging on. You wait for more of a decline ... then you can do some opportunistic buying."
The Dow Jones Industrial Average nosedived more than 800 points to turn in its worst sessions of the year as traders reacted to warning signs in the bond market. The drop was the fourth worst point slide in the index's history.
With the S&P up more than 13% and the tech-heavy Nasdaq up more than 17% in 2019, Cramer still has confidence stocks have a chance to climb higher again.
Wall Street fell hard after the yield on the benchmark 10-Year U.S. Treasury bond slipped below the 2-Year bond yield, known as a yield inversion, for the first time in more than a dozen years. When the yield curve inverts, short-term bonds are more profitable than long-term bonds and is accepted as a warning sign that a recession may be on its way.
The 10-Year bond finished the day 2 basis points above the short-term yield.
Former Fed Chair Janet Yellen shares the host's view that the yield inversion may not be signaling this time that a recession is on the horizon.
"The bears will tell you that any time we see Treasurys behaving like this, a recession surely follows," Cramer said. "I think that's a misread of the current situation."
Cramer said a number of factors are worrying investors about the market. That includes thoughts that the ongoing U.S.-China trade war could destroy global commerce, short-term interest rates set by the U.S. Federal Reserve are too high, many foreign government bonds are sporting negative interest rates and Brexit, among other things, he said.
"For the moment, it doesn't matter. Whatever the cause, we can not ignore the bond market's behavior. It's too extreme," Cramer said. Of course, many of these negatives are reversible. Almost all of them are man-made and, therefore, can reversed."
Stocks that are getting hammered by tariffs can rebound if the U.S. and China make a trade deal, the U.S. central bank could cut rates to boost bond the economy and bond yields, and many money managers are betting against the market, Cramer said.
"Right now, though, our stock market is handcuffed to the bond market," he said. "As long as that's the case, the momentum is with the bears, not the bulls, even if the bears ultimately turn out to be wrong."