[Good Morning Stock Market] Tech Stock Rally in US Market... Recession Concerns Remain a 'Burden'

Tesla Soars 8% on Earnings Expectations, Tech Stocks Rise
Kospi Expected to Start Higher on 29th

However, Inverted Yield Curve Raises Recession Concerns
Fed's Soft Landing Efforts and Inflation Remain Key Variables

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] On the 28th (local time), the U.S. stock market closed on an upward trend. Although the U.S. administration mentioned expanding taxes on the wealthy in next year’s budget announcement, the market responded more strongly to hopes for a ceasefire between Ukraine and Russia. The KOSPI on the 29th is also expected to rise in line with the U.S. stock market’s gains. However, the inversion of short- and long-term interest rates has raised concerns about a recession again, which is expected to limit the index’s upside.

Sangyoung Seo, Researcher at Mirae Asset Securities: “Nasdaq Index Rise, KOSPI Expected to Climb”

The U.S. stock market closed higher on hopes for a ceasefire after a draft related to Ukraine peace negotiations was reported. The Nasdaq rose 1.31%, while the Dow Jones Industrial Average increased by 0.27%, and the S&P 500 went up 0.71%.

The Nasdaq showed gains supported by strength in technology stocks. Tesla surged 8% on positive news that it will request approval to increase the number of common shares to pay stock dividends at this year’s shareholders’ meeting. Additionally, Amazon (2.5%), Microsoft (2.3%), and software sector stocks such as Intuit (4.6%) and Adobe (4.2%) also showed upward momentum due to positive earnings outlooks.

On the other hand, financial stocks like JPMorgan (-0.7%), Bank of America (-0.4%), and Wells Fargo (-1%) declined amid recession concerns triggered by the inversion of short- and long-term interest rates. Energy sector stocks such as ExxonMobil (-2%) and ConocoPhillips (-3%) fell due to the sharp drop in international oil prices.

Considering these factors, the domestic stock market is expected to rise influenced by the Nasdaq’s gains. In particular, the U.S. administration’s confidence in the U.S. economy and its outlook that high inflation may stabilize over time are also favorable for the domestic stock market.

However, attention should be paid to the inversion between the 5-year and 30-year U.S. Treasury yields, which has highlighted recession concerns. The inversion of short-term bond yields exceeding long-term bond yields is generally regarded as a precursor to a recession. Currently, the Japanese yen is rapidly weakening, trading below 1,000 KRW per 100 yen for the first time since 2018. The decline in the KRW/JPY exchange rate during 2014-2015 raised concerns about the weakening competitiveness of Korean export companies, increasing volatility. Therefore, the depreciation of the KRW/JPY exchange rate is expected to weigh on the domestic stock market. While the KOSPI may show an upward trend, it is more likely that individual stock rallies will dominate rather than a broad market rise.

Sungwoo Park, Researcher at DB Financial Investment: “Fed’s Effort for a Soft Landing, Attention Needed on High Inflation”

With the start of interest rate hikes, the Federal Reserve’s (Fed) ability to achieve a soft landing for the economy has become crucial. Historically, after entering tightening cycles, there have been debates about recessions, but it is difficult to predict the exact timing of a recession in advance. Reviewing the real economy mainly based on current U.S. consumer conditions, the economy is slowing down, but the risk of recession this year is not high. However, as high inflation persists, real purchasing power is significantly threatened, and voices forecasting a recession after 2023 are gradually increasing.

The Fed’s current long-term plan is to raise the real federal funds rate, which is in negative territory, to a level slightly above neutral while conducting quantitative tightening simultaneously. If inflation risks do not ease, the Fed is expected to increase the tightening intensity further, which could raise the risk of recession.

In particular, the Fed’s effort to guide a soft landing this time is expected to be a difficult task due to high inflation uncertainty. The Fed is focusing on three past cases when it raised the benchmark interest rate to control inflation?in 1965, 1984, and 1994?but inflation was relatively stable during those times. Considering that historically, whenever the Consumer Price Index (CPI) inflation rate rose more than 5% year-over-year, a recession inevitably followed, it is predicted that the Fed has limited room to support the economy now.

However, if positive signals such as accelerated reopening, stabilization of commodity prices, and rapid resolution of supply chain disruptions emerge, the risk of recession is expected to be relatively reduced.

Jaehwan Heo, Researcher at Eugene Investment & Securities: “Growth Stocks, Aim for the Second Half of the Year and Buy Slowly”

Recently, themes that had been overlooked by investors during the stock price rebound process have become prominent. The reason is likely that the stock market has already priced in most of the negative impacts of interest rate hikes, and expectations have grown that although real interest rates will rise, the pace of rate increases will moderate in the second half due to easing economic and inflation pressures. Additionally, there is an expectation that as inflation rises, companies will increase automation investments to defend against rising costs.

In the domestic stock market, concerns about small- and mid-cap growth stocks, which had sharply declined, are easing. By theme, renewable energy, cloud, internet, and gaming stocks have risen.

It is still difficult to say that a full rotation into growth stocks has occurred, as uncertainties remain in the Chinese and Hong Kong stock markets. However, since growth stocks are expected to have opportunities to shine in the second half, a strategy of buying growth stocks slowly with the second half in mind is valid. There is no need to insist solely on safety due to concerns about war, inflation, and Fed policies.

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