[Good Morning Stock Market] Is the Saying "Sell in May" True?… COVID-19 Subsides, Entering Earnings Season

[Asia Economy Reporter Oh Ju-yeon] The stock market, which had fallen sharply last March due to the spread of the novel coronavirus infection (COVID-19), showed a steep rebound for about a month thereafter. The future focus of the market is whether the upward trend will continue. In the securities industry, attention is being paid to whether the stock market, which has historically shown weakness every May in line with the adage 'Sell in May,' will repeat this pattern this year. Since the KOSPI has quickly reached the 1950 level, the consensus is that it is necessary to keep open the possibility of increased short-term volatility.

◆ Lee Kyung-soo, Researcher at Hana Financial Investment = The domestic stock market saw a slight increase in preference for safe assets in the global stock markets last Thursday and Friday, when the market was closed domestically. Since investment sentiment is a key variable in the direction of the index amid uncertain earnings forecasts, a sideways movement of the index is more likely than a sharp rise. This leads to a shift from passive inflows to a market driven by individual stocks.

The clear inverse correlation between the short-selling ban and the upper (3M) factor of price deviation suggests that the temporary short-selling ban event until mid-September will result in a continuous strong performance of stocks with improving earnings.

Since the number of stocks with improving earnings is small, a premium is likely to form around this group. Recently, the number of stocks with upward earnings revisions over the past year was 91 (based on KOSPI), but currently it is about 50. During a period when earnings are the most important variable, attention is expected to focus on this small number of stocks with upward earnings revisions.

◆ Seo Sang-young, Researcher at Kiwoom Securities = The U.S. stock market started lower due to Amazon's (-7.60%) poor operating profit and rising concerns over the U.S.-China trade dispute. Especially, the intensification of the trade dispute amid the trend of economic slowdown caused by COVID-19 is a factor that dampens investment sentiment.

As de-globalization spreads due to COVID-19 and concerns over trade disputes among countries increase, Trump added fuel to the fire. Trump announced that he had seen evidence that COVID-19 originated from a virus laboratory in Wuhan, China. Amid ongoing conspiracy theories, Trump's remarks have sparked political friction between the U.S. and China. In response, Trump mentioned preparing retaliatory measures such as imposing tariffs on China, indicating that the U.S.-China trade dispute may intensify further.

Meanwhile, U.S. first-quarter operating profits of S&P 500 companies are estimated to have decreased by 13.7% year-on-year, with second-quarter down 36.7%, third-quarter down 19.6%, and fourth-quarter down 8.1%, showing a trend of expanding operating profit declines. As a result, the 2020 operating profit of the S&P 500 decreased by 17.8% compared to the previous year.

The problem is that the U.S. stock market, which had focused on positive factors such as economic reopening and expectations for COVID-19 treatments, began to react to negative factors after April 30. It is expected that the market will respond more sensitively to negative factors than positive ones in the future, making increased volatility inevitable.

◆ Lee Eun-taek, Researcher at KB Securities = Although COVID-19 has had a huge impact on the economy, the stock market's sharp rise is remarkable. It has already returned to the 1950 level, which was the starting point of the previous sharp decline.

Looking at past recession cases, there are three reasons to believe that the bear market has ended and a rebound rally has begun.

The stock price bottom usually appears before the economic bottom, typically about one month before the peak in unemployment claims and about three months before the peak in the unemployment rate. Considering that the peaks of these two data points are expected around the end of March and May, the end of March can be considered the stock price bottom.

During recessions, the stock price bottom precedes the GDP bottom by about one quarter, so this also supports the view that the stock price bottom was at the end of March.

The rebound rally immediately after a recession occurs with earnings estimates continuing to decline while valuations surge. The more aggressive the monetary policy during a recession, the stronger and faster the valuation rebound tends to be. Investors should not overlook the impact of interest rate cuts on stock prices due to weak fundamentals.

From mid-May, as lockdown easing begins in earnest, short-term corrections may occur. While lifting lockdowns is good news for fundamentals, it introduces uncertainty for sentiment. It would be ideal if the easing proceeds without any problems, but issues may arise.

The decline in new confirmed cases may suddenly stall, or localized resurgences may occur. Additionally, conflicts between the U.S. Republican and Democratic parties over additional stimulus measures, tensions between Southern and Northern Europe, and the potential rekindling of conflicts among oil-producing countries over production cuts ahead of the early June OPEC meeting are also risk factors. However, such corrections should be viewed as buying opportunities.

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