[Good Morning Stock Market] "Despite Concerns of COVID-19 Resurgence, Low Possibility of Severe Market Correction"

[Asia Economy Reporter Eunmo Koo] As signs of a resurgence of the novel coronavirus infection (COVID-19) deepen concerns about a market correction, an analysis suggests that the likelihood of a shock as severe as that experienced in February to March occurring again is low. At that time, uncertainty was so great that it was difficult to gauge the extent and scope of the real economy's contraction, but now, with policy responses in place, the outline can be estimated.

◆Jinwoo Lee, Researcher at Meritz Securities=There is no correction that everyone welcomes. The reality is that when a correction actually comes, it is frightening and uncomfortable. June 18 was no different. Since June 15 (KOSPI -4.76%, KOSDAQ -7.09%), the most intense correction in over two months occurred, naturally doubling anxiety. The key lies in the background of the correction. If concerns about the resurgence of COVID-19 triggered the correction, the essence is judged to be the market's short-term overheating. This is because 2 out of 10 components of the KOSPI 200, composed of large-cap stocks, were already in a technical overheating zone.

The reason for worrying about the resurgence is the fear of a sharp contraction in the real economy. There is concern that the recovering real economy may retreat again. However, a simple comparison with February to March is difficult. At that time, uncertainty was so great that it was difficult to gauge the extent and scope of the real economy's contraction, whereas now, with policy responses, the outline can be estimated, which is the biggest difference. If the resurgence were the real reason for the market correction, it would have been difficult for the U.S. stock market to reach new highs despite the resurgence trend.

The learning effect from bad news sometimes confuses the market. The "fear of numbers" is an example. Let's go back to February. The market's reaction path to the number of new COVID-19 cases was as follows. Until February 19, the daily domestic confirmed cases remained in single digits, but from February 21, they began to surge to 100, entering the 500 range on February 27, and reaching 851 on March 3. It took only 12 days to go from the 100s to the 850s. As of midnight on the 18th, the daily confirmed cases were 246, marking the fifth consecutive day in the 100-200 range, which, in terms of numbers and speed of increase, could trigger trauma related to the disease.

However, we want to draw a line from the possibility of a large market shock like that in February to March. The sequence of COVID-19 spread → real economy contraction concerns → crude oil price plunge → high-yield market contraction → dollar liquidity squeeze seems unlikely to be repeated. If problems spread, it might be useful to check crude oil and the high-yield market as proxies. Otherwise, the current situation should rather be seen as a short and sharp correction similar to early June. This is because the pattern of market correction after rotation into neglected stocks is still similar.

◆Sangyoung Seo, Researcher at Kiwoom Securities=On the 18th, the Korean stock market plunged as news spread in the latter part of the trading session that the government would issue an emergency statement due to a resurgence of COVID-19 caused by some religious groups. This is presumed to be due to increased possibilities of economic contraction from strengthened social distancing measures. Meanwhile, looking at other financial markets, the foreign exchange market showed limited impact, and in the bond market, foreign investors' net buying of bond futures increased the gains, but the impact was also limited. Considering this, the stock market is judged to have overreacted compared to other financial markets. This is presumed to be because the Korean stock market had a large rise in July and August, increasing the desire for profit-taking.

Today, the U.S. stock market also showed strength only in some non-face-to-face related stocks supported by increased online sales, while most sectors, including financial stocks that had risen significantly last week, showed weakness. Ultimately, although the U.S. market, especially the Nasdaq, continued its upward trend and the S&P 500 index reached an all-time high, attention should be paid to the fact that trading volume sharply declined, indicating a cautious stance. This is presumed to be due to market participants' increased desire for profit-taking and concentration in some stocks. Considering this, the Korean stock market is also expected to show fluctuations depending on changes in individual stocks amid continued profit-taking selling pressure.

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