[The Editors' Verdict] Winter Is Coming

[Asia Economy Reporter Jeon Pil-su] "Winter is coming."

This is a famous line from the American drama (mid) "Game of Thrones," which was also popular in Korea. This phrase, often repeated by the protagonist family guarding the northern kingdom, has recently been circulating in the stock market as well. After hitting an all-time high in mid-last year, the market has been corrected by more than 20% over the past year, and market participants who had been calling for buying at low prices now openly express fear of a full-fledged bear market.

On the 14th, when the KOSPI fell below the 2500 mark for the first time in 1 year and 7 months, a head of a securities firm research center even said that predicting the bottom might be meaningless. This was in the context of growing anxiety over whether the U.S. Federal Reserve can control inflation, making it futile to predict the lower bound of the index in this fearful situation. Even those who believe there could be support around 2400 unanimously agreed that rushing into buying at low prices is risky. The advice is, "Holding cash is the best strategy."

To put the advice of holding cash as the best strategy more bluntly, it means selling stocks and simply staying out of the market for a while. For investors who have experienced a record-breaking bull market over the past two years, this advice is hard to accept easily, but considering the environment surrounding the market, one cannot help but listen to this radical advice.

Last month, the U.S. inflation rate hit 8.6%, the highest in 41 years. The foreign exchange crisis that pushed emerging countries including Korea to the brink of bankruptcy was 25 years ago, and the global financial crisis that shook even developed countries to the extent that the U.S. credit rating was downgraded was only 14 years ago. Forty-one years ago was the time of the second oil shock, when inflation and recession appeared in a double-dip form, shaking the global economy.

Usually, prices rise during economic booms and fall during recessions. During booms, a lot of money circulates, causing prices and interest rates to rise, while during recessions, money circulation slows, causing the opposite effect. Exceptionally, there are times when prices rise while the economy is in recession, known as stagflation, and the end of that period was 41 years ago. This means that inflation in the U.S., the center of the global economy, has risen to levels seen at that time. Moreover, rapid interest rate hikes and sustained high oil prices raise the possibility of recession. This is the background behind panic selling by terrified investors in the U.S. and global stock markets.

As holding cash is the best strategy, it is indeed best to stay indoors during a blizzard. The problem arises when a significant portion of the portfolio is held in stocks. The snowstorm rages, but the shelter is too far away, so survival must be sought outside. It is advantageous to build a portfolio focused on stocks that can withstand inflation and even stagflation. Companies with market dominance in B2B sectors, gold, financial, and energy companies are commonly mentioned as alternatives.

Although a return to a bull market seems distant, there is no need to be overly pessimistic about the stock market itself. In 1981, when U.S. inflation was recalled, the U.S. raised its benchmark interest rate to as high as 19%. This was because inflation had risen over 10% since 1979. However, thanks to high interest rates, inflation expectations decreased after 1982, and the Dow Jones Index, which was only 1,000 at the time, rose to 10,000 by 2000.

"A bull market is born in pessimism, grows in skepticism, matures in optimism, and dies in euphoria."

This is a legendary investment quote by Sir John Templeton.

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