Cramer questions bank comeback because of default risk, praises Morgan Stanley as 'reinvented'

Published Wed, Aug 12 202011:57 AM EDT

(This story is only for CNBC Pro subscribers ) Stocks of some of the largest U.S. banks are rising recently on optimism about the progress of the U.S. economy and a job-market rebound lifted cyclical names across the board. But CNBC's Jim Cramer advised investors to be a bit more selective in the current market, and especially when it comes to bank stocks . The " Mad Money " host warned that despite the broad uptrend, certain banks are still seeing a flurry of defaults that may ultimately weigh on their business fundamentals and profit results in upcoming financial reports. "This move is about fewer defaults and that has not — it's not true. It's not true," Cramer said on " Squawk on the Street " Wednesday morning. "If you look at the actual 8-Ks, if you look at the actual businesses and the defaults are piling up – and yet the stocks rally." Though most of Wall Street's largest banks with significant consumer segments traded lower on Wednesday, shares of JPMorgan Chase , Wells Fargo , Bank of America and Citigroup are up 6.1%, 2.7%, 5.7% and 4.5%, respectively, over the last week. The uptick has followed the Labor Department's better-than-expected jobs report and other signs that the U.S. economy may, slowly but surely, be recovering from Covid-19 business closures and an abrupt halt to commerce. Other cyclical (or economically sensitive) stocks have also rallied in recent weeks. The S & P 500 industrials components are up 5.8% over the last week, trailed by financials (up 4.1%), energy (up 2.3%) and communication services (up 2.1%). Investors may be buying the banks across the board based on bets that a healthier U.S. jobs market and economy would ultimately lead to higher interest rates, fewer missed loan and credit payments and greater demand for credit among borrowers. But Cramer warned that it's likely too early to sound the all-clear, and recommended investors do a better job discriminating between banks based on the health of their underlying business. He highlighted Morgan Stanley as an example and discussed its prudent acquisition of E-Trade to explain how that bank's management is adapting to changes in the financial arena. "That's why you buy Morgan Stanley: Because they don't have that [default] risk," Cramer said. "It's true that the assets go out the door every morning, but [CEO James] Gorman has reinvented the franchise."

VIDEO2:0902:09

Jim Cramer: Banks are a default risk

Squawk on the Street

(This story is only for CNBC Pro subscribers)

Stocks of some of the largest U.S. banks are rising recently on optimism about the progress of the U.S. economy and a job-market rebound lifted cyclical names across the board.

But CNBC's Jim Cramer advised investors to be a bit more selective in the current market, and especially when it comes to bank stocks.

The "Mad Money" host warned that despite the broad uptrend, certain banks are still seeing a flurry of defaults that may ultimately weigh on their business fundamentals and profit results in upcoming financial reports.