[Good Morning Stock Market] "January Market Shows Rational Overheating... 'Correction Imminent Theory' Is Still Premature"

"US 10-Year Treasury Yield, Bitcoin Price and Other Indicators Not Yet at Risk Levels"
Kospi Uptrend May Continue Until 2022

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Both the U.S. and domestic stock markets have surged sharply since the beginning of the year, prompting talks of an 'imminent correction.' However, since this is the first year of the new administration's term, it is expected that a bold fiscal policy will sustain the bullish market through the second quarter, followed by a 'high first half, low second half' market pattern in the latter half of the year due to various baseline effects weakening the upward momentum.

◆ Namjoong Moon, Researcher at Daishin Securities = From the perspective of behavioral economics, concerns about a stock market bubble indicate that rational thinking is still at work. At this point, it is not yet time to discuss the final stages of speculative rises that would constitute 'irrational overheating.' The term 'irrational overheating' was used by former U.S. Federal Reserve Chairman Alan Greenspan in December 1996 to warn about the stock market at that time. Three years later, in 2000, a stock market bubble occurred.

Unprecedented monetary and fiscal policies in response to the COVID-19 crisis have driven rapid stock market gains. However, COVID-19 has not yet ended. Nominal price indicators have risen enough to suggest an imminent market correction. Nevertheless, considering the uncertain economic and corporate management environment, it is expected that the liquidity-driven market led by monetary and fiscal policies will continue this year.

In particular, it is important to recall the symbolic significance of this year being the first year of the Joe Biden U.S. administration. Since 2000, the average return of the S&P 500 in the first year of a new U.S. administration has been 9.9%, showing a clear directional trend. Given that this administration took office amid the COVID-19 crisis, it is expected that the stock market will continue to rise steadily through the second quarter based on more aggressive fiscal policies. Afterward, in the second half of the year, a 'high first half, low second half' market is expected as the upward momentum slows due to baseline effects in economic and earnings indicators.

Before discussing irrational overheating in the U.S. stock market, three leading indicators?the U.S. 10-year Treasury yield, Bitcoin and Tesla price indicators, and the OECD Leading Economic Index?have not yet crossed critical thresholds that would signal a market correction.

First, as of the 22nd, the U.S. 10-year Treasury yield stood at 1.09%, below the 1.92% level that previously triggered market concerns. This is lower than the rate during former Fed Chairman Ben Bernanke's tapering remarks in May 2013 and also lower than the levels around December 2015 when quantitative easing ended and monetary policy normalization began, with unemployment at about 5%. Considering this, recent concerns about early Fed tightening are unfounded. As of the end of last year, the U.S. unemployment rate was 6.7%, indicating that the Fed should maintain the current monetary policy stance to fulfill its key mandates of full employment and price stability.

Bitcoin and Tesla stock prices began a significant rally following the spread of COVID-19, so a sharp drop in these assets could indicate irrational overheating. Although Bitcoin prices have shown volatility due to rapid short-term increases, they are holding the psychological support level of $30,000, and Tesla stock has maintained the $800 level since forming a peak on the 8th. This suggests the market has not yet entered a phase that would provoke instability. The OECD Leading Economic Index for the U.S. in December was 99.2, below the expansion threshold, indicating it is not at a level that would impact a market decline. Ultimately, the current market shows signs of rational overheating, and it is not yet time to discuss a sharp market drop.

◆ Wonyong Shim, Researcher at Shinhan Financial Investment = There are phenomena that contradict the hypothesis that markets are efficient. One of these is the 'January effect,' which refers to the tendency for stock market returns in January to be relatively higher than in other months without any specific catalysts. In the domestic market, the KOSDAQ index typically outperforms the KOSPI in January. This is generally explained by expectations of policy and corporate environment improvements at the start of the year and year-end individual tax issues.

Since 2000, the Korean stock market has exhibited the January effect. Based on monthly returns over 20 years through 2019, the average January return for the KOSPI was 1.1%, 0.6 percentage points higher than the average for other months. The KOSDAQ index's average January return was 4.3%, the highest among all months and compared to the KOSPI. Last year, volatility increased due to repeated sharp declines and overshooting caused by COVID-19. At a point where some normalization from the shock has occurred, it was checked whether the market still follows the same monthly pattern. As of the close on the 22nd, the KOSPI rose by +9.3% and the KOSDAQ by +1.2%, with both markets up, but the KOSPI's significant outperformance differs from previous years.

This was largely due to a significant increase in individual investor activity. This year, a pattern of tax-avoidance selling followed by repurchasing, similar to that seen in the KOSDAQ, was also observed in the KOSPI market. Historically, the KOSPI has shown mid- to long-term outperformance during recovery phases following economic downturns. Focusing on the economic recovery cycle, the KOSPI's mid- to long-term upward trend is expected to remain valid. Given that during past financial crises rebounds, pauses, and secondary rallies occurred, assuming the additional upward trend continues for about 19 months as before, a strong KOSPI market can be expected through the first half of 2022.

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