[The Editors' Verdict] The Next Momentum for the Unflinching Market

Kim Kyung-soo, Professor Emeritus at Sungkyunkwan University

Global stock markets are heating up in June. Last week, many Asian markets, including the KOSPI index, rose for five consecutive days. The surge in global markets is attributed to the massive liquidity injections by central banks and governments in developed countries. The U.S. employment data released last Friday (the 5th) fueled the optimistic market sentiment. On the 8th (local time), the Nasdaq index in the New York stock market broke its all-time high.

The $449 billion liquidity swap funds supplied by the U.S. Federal Reserve (Fed) to 14 central banks helped stabilize exchange rates against the dollar and encouraged investors to favor risk assets. The stabilization of dollar liquidity is also evident in South Korea. The one-year maturity CRS rate applied when exchanging dollars for Korean won (a fixed won interest rate received in exchange for paying a variable dollar LIBOR rate) is gradually moving away from negative territory.

It is encouraging that the U.S. stock market, which leads global markets, is being caught up. However, putting aside technical issues, there are questions and concerns about how stock prices have soared so dramatically. There is skepticism about whether the massive monetary stimulus policies will recover the economy damaged by the COVID-19 pandemic without side effects, and concerns about a potential bubble burst.

Recent unrest and anxiety in U.S. society triggered by the death of Black man George Floyd prompt serious reflection on these questions. Some have described the market’s lack of reaction amid great turmoil as a sign of its "calmness." However, to be frank, the riots sparked by the Floyd incident may also indicate that the unprecedented economic stimulus measures have not been fully effective.

In the stock market, nothing is more certain than momentum for economic recovery. From the perspective of optimistic investors, the easing of lockdowns and the gradual return of the economy to normal, along with the May U.S. unemployment rate forecast at 13.3%?lower than the expected 20% and April’s 14.7%?can be seen as positive signs of a rapid economic recovery. However, not all stocks have risen. As Warren Buffett’s Berkshire Hathaway suffered nearly $50 billion in losses in the first quarter, the gap between growth and value stocks is widening. There are also pessimistic investors. On the day of the stock surge, the Financial Times (FT) reported that long-term investor Jeremy Grantham reduced his global equity allocation from 55% to 25% and invested in value stocks in developed countries outside the U.S.

Stock indices are used as leading economic indicators but cannot be fully trusted. Paul Samuelson, the first American Nobel laureate in economics, disparaged the stock market by noting it correctly predicted only 5 out of the last 9 recessions. However, no one disputes that the stock market is efficient "in the long run" (meaning a company’s stock price properly reflects its value). Being efficient in the long run means that in the short term, the stock market moves according to momentum. Over time, this momentum shifts to new momentum and then to another, ultimately reflecting all factors that determine a company’s value.

What will be the market’s next momentum? First, there is the possibility of delayed economic recovery or a second pandemic wave. Gold prices, which briefly plunged in late March but have since shown a steady upward trend, suggest widespread demand for safe assets and reflect investors’ alternative views on the economy. With the Fed’s large-scale asset purchases underway, U.S. long-term Treasury yields are also rising sharply. It is too early to conclude whether this reflects concerns about inflation as a side effect of stimulus measures, but it is an important variable to watch closely.

Kim Kyung-soo, Professor Emeritus, Sungkyunkwan University

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