[Good Morning Stock Market] Waiting for FOMC... Box Range Fluctuations and Stock-Specific Market Expected

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[Asia Economy Reporter Lee Seon-ae] On the 28th, the domestic stock market is expected to continue fluctuating within a box range, creating a stock-specific market. The New York stock market closed in a lull ahead of the Federal Open Market Committee (FOMC) regular meeting results announcement scheduled for the next day. On the 27th (Eastern Time), at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 35,058.52, down 85.79 points (0.24%) from the previous session. The Standard & Poor's (S&P) 500 index fell 20.84 points (0.47%) to 4,401.46, and the tech-heavy Nasdaq index closed at 14,660.58, down 180.14 points (1.21%). The three major U.S. indices were influenced by profit-taking following record highs the previous day and risk aversion due to the decline in the Chinese stock market. The Hong Kong stock market fell more than 4% for two consecutive days, and the Shanghai stock market also dropped over 2% due to regulatory impacts. In particular, technology stocks faced relatively strong downward pressure.

◆ Seo Sang-young, Researcher at Mirae Asset Securities = The Korean stock market started higher the previous day, buoyed by the strong U.S. stock market. Additionally, the robust earnings reports from some companies positively influenced the market. However, in the afternoon, as the Chinese stock market widened its losses due to increased regulations, escalating U.S.-China conflicts, and some forced sales, the market gave back its gains and closed lower. Notably, the KOSDAQ index turned negative with foreign selling emerging.

Meanwhile, the U.S. stock market was pressured by concerns over the spread of COVID-19, profit-taking in large-cap tech stocks that had risen sharply, a 1.86% drop in the Philadelphia Semiconductor Index, a 1.13% decline in the Russell 2000 Index, a 2.21% fall in the Dow Transportation Index, and the weakening of the Korean won, all of which negatively affected foreign investor flows.

Of course, the spread of the COVID-19 Delta variant could ease tightening concerns at the FOMC, which is a positive factor. Considering this, the Korean stock market is expected to open down about 0.3%, but rather than expanding the correction, it will likely show a stock-specific market as investors digest selling ahead of the FOMC.

◆ Lee Eun-taek, Researcher at KB Securities = Due to concerns over the 'economic peak + tightening,' volatility may continue for some time. However, the price adjustment caused by tightening is not the 'start of a bear market' but should be understood as a 'speed control process' that alleviates valuation pressures. Therefore, after the correction, the market is expected to return to a bull market, and price fluctuations present another buying opportunity.

The pace of economic and earnings improvement is expected to peak in the second quarter and gradually slow down, with a possibility of a temporary acceleration in the slowdown this summer. This is because some of the orders scheduled for summer to meet pent-up demand were pre-ordered between April and June, and some demand may be delayed until after summer due to rapid price increases. However, supply bottlenecks are expected to ease from autumn, leading to increased production and investment, so the contraction is likely to be short-term.

The problem is that the market has started to recognize these issues while the Federal Reserve must continue tightening. Historically, the combination of 'economic peak + tightening' has been a burden on the stock market. Of course, the Fed may delay or cancel tapering plans. The extent of market correction will depend on the direction of this decision, but under the basic scenario, a correction of about -10% from the peak is expected. Since concerns have been reflected through a 'time adjustment' over the past six months, the correction range will be limited.

Value stocks, which are in a 'good earnings + oversold' state, have short-term rebound potential. However, growth stocks (KOSDAQ) remain positive in the mid-to-long term. During the earnings season, value stocks with high earnings visibility and significant declines may rebound in the short term. But looking toward the first half of next year, KB Securities still prefers KOSDAQ growth stocks. Therefore, it is recommended to gradually increase exposure by buying growth stocks during corrections.

Among sectors, a positive view is maintained on gaming, eco-friendly, and bio sectors. These sectors are previously overlooked growth stocks with added macro momentum. The gaming sector has several major game releases planned after a period of inactivity, the eco-friendly sector benefits from European policies, Korea's second New Deal, and the creation of eco-friendly sector indices. The bio sector has favorable factors such as RNA-based technologies and government support. The secondary preferred sectors among large caps are 'semiconductors and automobiles,' expected to pass a short-term bottom around August when second-quarter earnings reports conclude. As supply bottlenecks gradually ease, production is expected to increase in autumn, showing a positive trend. Among small and mid-caps, niche sectors like 'contact-related consumer stocks' may offer bottom-fishing opportunities. August is a period where the 'Delta variant spread peak' and 'vaccine rollout resumption' intersect, providing opportunities in contact consumer stocks that have sharply declined in the short term.

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