The Dawn of the Era of Rational Overheating

The domestic stock market is at a point where trends are more important than volatility. For the stock market to continue rising, the catalyst of economic recovery is needed, and currently, the likelihood of economic recovery slowing down or recovery factors disappearing is not high.

According to the International Monetary Fund (IMF), the global economic growth rate this year has been revised upward by 0.3 percentage points to 5.5% compared to previous forecasts. The U.S. economy is expected to grow by 5.1% this year compared to last year. The upward revision for the U.S. is 2.0 percentage points, the largest change among advanced countries.

Leading indicators that suggest the investment environment and a sharp stock market decline are also remaining in the risk-on phase. The 10-year U.S. Treasury yield, and prices of virtual assets like Bitcoin and Tesla stocks are considered leading indicators that can gauge irrational overheating among investors. All are below critical thresholds that would indicate a sharp market drop. The 10-year U.S. Treasury yield is currently in the low 1% range, significantly below the average yield of 1.92% during the tapering mention period in May 2013. Bitcoin and Tesla prices are holding their psychological support levels at $30,000 and $700, respectively. The U.S. OECD Leading Economic Index for December (99.2) has not surpassed the baseline of 100, which could influence a market decline.

The preference for risk assets can also be inferred from the dollar (weakening) and oil prices (rising), which suggest coupling between the stock market and reduced market uncertainty. Indices widely used as early signals of crisis spread, such as the Volatility Index (VIX) and the CVIX?which calculates the 3-month implied volatility of nine exchange rates including the dollar, yen, euro, and Swiss franc?have moved out of the inflection range where stock market volatility increases.

With President Joe Biden’s inauguration, a large government led by the administration has emerged in the U.S. There is a high possibility that an additional stimulus package worth $1.9 trillion will be approved by March.

This is expected to play a major role in revitalizing the currently sluggish labor market and accelerating the pace of economic recovery. The U.S. Federal Reserve (Fed) has regained stability in the financial markets enough to be cautious of overheating risks and can now focus on its primary responsibilities of full employment and price stability. It will support sustained economic recovery.

Short-term corrections due to overheating are expected to be a pattern inevitably seen during the stock market’s rising phase through the first half of this year. Major overseas stock markets are expected to follow a 'high start, low finish' path, continuously rising until the second quarter of this year based on a combination of four factors: economy, earnings, supply and demand, and policy.

The U.S. Citi Economic Surprise Index (ESI) shows improving sentiment about the future economy following the passage of the fifth stimulus package. Since early this year, the global earnings per share (EPS) growth rate has improved, centered on leading sectors such as information technology and communication services. Additionally, the broad money supply (M2) growth rate in major countries supports abundant liquidity in the market, and 'Bidenomics' is expected to contribute to revitalizing consumption and investment, positively impacting the global trade environment.

If we consider that an era of rational overheating has begun, investment priority should be placed on stocks. In the upcoming stock market rising phase, if volatility increases due to noise, it should be seen as an opportunity to increase allocation.

Moon Nam-jung, Senior Research Fellow, Daishin Securities Research Center

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