[Inside Chodong] A Stock Market Even Fortune Tellers Can't Predict

[Photo by AP Yonhap News]

[Asia Economy Reporter Park Byung-hee] 4056.

At the end of 2020, 14 Wall Street banks and asset management firms released their average year-end forecast for the S&P 500 index for 2021. The S&P 500 index closed last year at 4766.18, 17.5% higher than the Wall Street average forecast. It was also 8.3% higher than the highest forecast of 4400 by JPMorgan Chase among the 14 banks. Every year at the end of the year, not only Wall Street but also domestic securities firms release their stock market forecasts for the new year, but they rarely come true, making one wonder what the point is.

American economist John Kenneth Galbraith (1908?2006) pointed out the futility of economic forecasts by saying, "The only function of economic forecasting is to make astrology look respectable." Therefore, it should be considered quite difficult to make money through stock investment.

January 4 is also the birthday of Isaac Newton (1643?1727). Newton was born 379 years ago today. He was one of the greatest geniuses in human history but an irrational stock investor. The story that Newton lost almost all his fortune investing in the South Sea Company stock is famous in the stock market.

Newton initially bought shares for less than 200 pounds and sold them at 350 pounds, making some moderate profits by selling when the price was right. However, the South Sea Company's stock price surged past 1000 pounds at the peak of the bubble. Newton regretted not holding onto the stock longer to make bigger profits and ended up buying more shares just before the bubble burst. When he incurred losses, Newton made irrational investments by averaging down and even borrowing money.

Last year, as the New York stock market surged, bubble concerns intensified. The original bond king Bill Gross warned of risks, saying the market was in a state of "euphoria." Articles also pointed to "animal spirits."

Animal spirits is a concept introduced by John Maynard Keynes (1883?1946) in his 1936 book "The General Theory of Employment, Interest, and Money," explaining humans' non-economic nature. Keynes pointed out that humans often act based on animal instincts or emotions, making them irrational and uncalculating. Therefore, many stock investors fail to calculate rationally, which causes instability in the stock market.

Last year, the frenzy of animal spirits swept not only the stock market but also Bitcoin, crude oil, and commodity markets. This was caused by the massive liquidity unleashed as central banks worldwide drastically lowered benchmark interest rates in response to COVID-19. Especially, the U.S. Federal Reserve, as the issuer of the global reserve currency, maintained zero interest rates for over a year, and when U.S. President Joe Biden took office, a $1.75 trillion fiscal spending package rapidly expanded global liquidity.

On the other hand, as jobs decreased and income inequality widened, there is a bitter thought that growing doubts about the value of legitimate labor may have contributed to asset price increases as people sought compensation through asset investment.

Anyway, this year, the U.S. is expected to tighten its money supply in earnest. The Fed plans to end quantitative easing around March and begin raising benchmark interest rates. About three rate hikes are expected this year. With liquidity shrinking, it will be difficult for animal spirits to run rampant as they did last year.

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