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Jim Cramer's guide to investing: Be wary of the IPO cycle

Bryan Bedder | CNBC
  • CNBC's Jim Cramer said to be cautious when the market is flooded with initial public offerings because the influx of new stocks will inevitably drag the market down.
  • Cramer looked back at the boom and bust of the IPO market a few years ago.

CNBC's Jim Cramer said to be cautious when the market is flooded with initial public offerings because the influx of new stocks will inevitably drag the market down.

"As much as I love anything that generates enthusiasm for the stock market, of course — and nothing does that like a few massively successful IPOs— you've got to be careful when we get a whole wave of new issues," he said. "The IPO cycle tends to start out strong and generate a lot of euphoria, but then it burns out and all the new stock supply can really weigh on the market."

He looked back at the wave of IPOs and SPAC mergers that hit the market in 2020 and 2021, noting that Wall Street eventually lost interest in these stocks after the frenzy. Investors were especially excited about any new companies related to electric vehicles. These stocks eventually ended up getting crushed, Cramer said, with him pointing out that many plunged "more than 90% from peak to trough."

According to Cramer, all of these new stocks overwhelmed Wall Street — there was too much supply and not enough demand. And after the Federal Reserve indicated it would raise rates in the fall of 2021, many of these new companies suffered throughout 2022, he said. He added that investors tend to sell off other stocks to raise cash to buy these IPOs, and "the new tends to crowd out the old."

"I've said it a million times: the stock market is like any other market, it's all about supply and demand," he said. "Too much supply and prices are going to be lower."

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