[Good Morning Stock Market] Policy Effects Are Valid but... Rebound Speed May Be Slow

Stock Market Rebounds Despite US Economy Entering Recession
Expectations Reflect Short Recession Period
"Economic Recovery Likely Slow Due to Service and Consumer Focus"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Despite the U.S. economy entering a recession, the stock market is showing a rebound, indicating a 'decoupling' phenomenon between the economy and financial markets. This is because the stock market has preemptively priced in expectations that the recession will be short-lived. However, there are concerns that the actual economic recovery will be very slow. Not only in the U.S. but also in various countries, stimulus measures are driving stock price increases, but the upward momentum may be somewhat weak.

◆ Hwan Kim, Researcher at NH Investment & Securities = The U.S. stock index based on the S&P 500 recorded a 'V-shaped' rebound, rising 25% from its low after falling 34% from its peak. This is due to the Federal Reserve (Fed) expanding its corporate bond purchases this month from investment-grade bonds to include some downgraded large junk bonds. In fact, the purchase scale was increased from $200 billion to $750 billion. As a result, credit risk eased rapidly with a lower likelihood of large companies going bankrupt, improving investor sentiment.

Recently, the financial market seems to be reflecting a short recession rather than a slow economic recovery. The consensus forecast for U.S. GDP growth in Q2 dropped to an annualized -26%. In contrast, the consensus for Q3 and Q4 rebounded to 9% and 6.4%, respectively. While GDP growth forecasts were rapidly adjusted to reflect the recession, consensus adjustments appear to have concluded since mid-month. Starting next month, phase one economic activities will resume mainly in 25 states, and for President Donald Trump, stimulus measures are crucial ahead of the election. Therefore, the U.S. economy is likely to rebound after Q3.

The quarterly earnings per share (EPS) forecasts for the S&P 500 have also been rapidly revised downward. Earnings forecasts for Q2 and Q3 are expected to contract by 24% and 7.6% year-over-year, respectively, but Q4 earnings are expected to show positive growth compared to the same period last year. This suggests that as excessive fear of recession in the financial market eases, the recession phase is shorter than in the past, and a rebound in the economy is anticipated in the second half of the year.

However, the recovery speed is expected to be very gradual due to the structure focused on the service sector. The service sector accounts for about 70% of U.S. GDP, similar to other advanced countries, but private consumption accounts for about 68%, which is larger than in other advanced countries. The service and consumption shares are also higher than in emerging countries like China. This implies that the U.S. economic recovery may be slower than China's, which can drive recovery through manufacturing by restarting factories after the COVID-19 pandemic.

Currently, the Fed is supplying liquidity on a large scale, rapidly expanding its asset size. Recently, as stock prices showed a V-shaped rebound, the Fed slightly reduced liquidity supply and made minor adjustments. However, global investment banks (IBs) forecast that the Fed's asset size will expand from the current $6.6 trillion to around $9-10 trillion by year-end, so policy expectations remain valid. Therefore, the stock market will continue its rebound, but valuation pressures due to the decoupling of stock prices and the economy may weaken the upward momentum of stock prices.

◆ Byunghyun Cho, Researcher at Yuanta Securities = Investment sentiment will revive only when the U.S. employment situation improves. The investment sentiment of foreign investors, who have shown a lukewarm attitude in the domestic stock market, is in the same context. Currently, the economic situation in the U.S. and other advanced countries is under what is called a 'lockdown.' Lockdown ultimately leads to a sharp drop in employment (increase in unemployment), which forms a link that worsens investment sentiment. Therefore, as the U.S. lockdown eases and the rate of increase in unemployment slows, investment sentiment is expected to improve, and positive changes in fund flows in emerging markets and the domestic stock market can be anticipated.

A positive sign is that new unemployment claims have been decreasing since reaching 6.86 million on the 27th of last month. The figure for the last week of this month, to be announced on the night of the 30th Korean time, is expected to decrease to about 3.5 million from 4.42 million the previous week. Additionally, signs indicating recent reemployment are also being confirmed, suggesting that the extremely contracted foreign fund flows may gradually improve.

This content was produced with the assistance of AI translation services.