KOSPI Rises for 8 Consecutive Months, Is a Correction Coming?

'Longest Ever' Expectation of 9 Consecutive Months of Increase↑
Stock Market Rises Despite Exchange Rate↑ and Interest Rate↓
Exports Lead Gains...3Q Decline Possible Without 'Surprise Earnings'

On the 25th, when the KOSPI surpassed the 3,300 mark for the first time in history and closed at 3,302.84, a dealer is smiling broadly in the Hana Bank dealing room in Jung-gu, Seoul.
[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] The KOSPI has continued its upward trend for eight consecutive months through this month, tying the record for the longest consecutive monthly rise in history. While there is potential for further gains, some forecasts suggest that in the third quarter, the market may need to ease heightened technical pressures, which could result in weaker upward momentum or even a decline.

KOSPI Aiming for the Longest Consecutive Rise in History

According to the Korea Exchange on the 26th, the KOSPI has shown an eight-month consecutive rise from December last year through this month. This matches the all-time longest record of eight consecutive months of gains from December 2016 to July 2017. If the market rises again next month, it would mark the first time since the KOSPI's inception that it has experienced a nine-month consecutive rally.

This upward trend is said to increase the justification for a short-term correction. In 2017, the market rose for two months beyond the previous longest record of six months, but the magnitude of the rise was not significant. The seventh month saw a 1.9% increase, and the eighth month only 0.5%. Therefore, even if there is an additional rise next month, the increase is likely to be modest.

Moreover, uncertainty remains high as the market is treading new ground. Since the sharp drop in March last year, the KOSPI has risen every month except October, when uncertainty over the U.S. presidential election was high. This means the market has been bullish for 14 out of the last 15 months. Since 1980, the maximum number of rising months within 15 months was 12, so this is a new record.

Exchange Rate and Stock Market Rise, Interest Rates Fall... An Unusual June Market

Typically, the stock market tends to rise when the exchange rate falls and interest rates rise. On a monthly basis, the probability of the stock market and exchange rate moving in opposite directions was about 70%. The probability of the stock market moving in the same direction as interest rates was around 55%. Especially, the stock market often moved opposite to the exchange rate. This month, until the previous day, the won-dollar exchange rate rose by 2.06%. Since 2000, in months when the won-dollar exchange rate rose by more than 2%, the KOSPI fell by an average of -2.1%. When the won-dollar exchange rate rose between 1% and 3%, the KOSPI dropped by -1.9%. However, this month, the KOSPI has already risen by 3.09%.

It is rare for the stock market to rise amid rising exchange rates and falling interest rates as seen this month. Since 2001, out of 246 months, this scenario occurred only 19 times (7.7%). Junho Byun, a researcher at Heungkuk Securities, explained, "Typically, rising exchange rates and falling interest rates indicate a period when risk asset investment sentiment is shrinking, so the stock market rising under these conditions suggests either a favorable market environment or an irrational or emotional overheating." He added, "If interpreted as the former, the stock market will continue to rise; if the latter, the market may have reached a point of burden."

Among the 19 previous cases, when the stock market had been rising continuously for several months and the exchange rate rose while interest rates fell, the stock market tended to rise further over the next month on average, but the average fluctuation over three months declined. This suggests signs of increased volatility or weakening risk asset preference in the financial market. Therefore, researcher Byun forecasted, "Empirically, the possibility of further stock market gains in July remains open, but the strength of the market's rise in the third quarter is likely to be weak or may even decline."

Performance Burdens Including Exports... Disappointment Possible Without Surprise Earnings

There are also performance-related burdens. The KOSPI's earnings forecasts have been continuously revised upward, reflecting 'surprise earnings' in the first quarter. The KOSPI's 12-month forward price-to-earnings ratio stands at 11.6 times, lower than at the beginning of the year. If second-quarter earnings exceed expectations, the valuation burden on the market could ease, but if earnings meet or fall below expectations, the market may be judged as overvalued.

The favorable trend in domestic exports, which has already been priced into the KOSPI, must also be considered. The current KOSPI is at about 6.9 times the 12-month average monthly exports, showing signs of turning downward from a historical high. While the KOSPI could gradually rise with further export strength, if it does not surge beyond expectations, the market's upward momentum may slow or be perceived as a short-term peak signal. Researcher Byun advised, "Ultimately, the third quarter requires a process to ease the heightened technical burdens. With factors such as the potential autumn spread of the COVID-19 Delta variant, uncertainties over the U.S. Federal Reserve's tightening, and the fading base effect, it is necessary to lower expectations and formulate strategies for the third quarter."

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