[100-Year Life Finance] Stock Prices Hit Bottom... Don't Sell Out of Fear

The KOSPI briefly fell below the 2300 level. Several factors fueled the decline. First, inflation. In June, the domestic consumer price inflation rate reached 6.0%, the first time in 13 years. Inflation in the United States is also not improving easily. The high prices have increased fears of interest rate hikes. Given the current atmosphere, it seems that the Bank of Korea will raise rates by 0.5%p in July, and the U.S. Federal Reserve (Fed) by 0.75%p.

Recently, the economic recession has become a bigger issue than interest rate hikes. Since the economic expansion that lasted 13 years after the financial crisis must be wrapped up, and interest rate hikes have overlapped, this economic slowdown is likely to be greater than any other time. For our market, which is sensitive to the economy, this is a cause for concern.

The government's and central bank's failure to find their footing is also contributing to the stock price decline. The Fed said there was no need to worry about inflation but ended up in trouble. Now, they are only thinking about quickly correcting their mistakes, but given the circumstances, they are pushing too hard in the opposite direction. When asset price bubbles are severe like now, interest rate hikes should be conducted cautiously, but such warnings seem to be ignored. Continuous large interest rate hikes have created a situation prone to financial crises. Financial crises often occur when interest rates are sharply raised while asset prices are in a bubble state.

Because of these negative factors, the KOSPI fell to 2300. Although factors pulling the market down remain strong, the additional decline is not expected to be large. Among all factors, the most influential is that prices have reached a low state. Before the COVID-19 outbreak, the KOSPI was around 2200. This is a similar level to now, meaning that all the increases due to liquidity after the COVID-19 outbreak have disappeared. Another case also needs to be considered.

In the 2010s, the KOSPI moved in a peculiar pattern. From 2011, for nine years, the stock price fluctuated only between 1900 and 2200. There was a one-year period when it broke out of the box range, but it soon fell back, not enough to assign significance. The fact that the stock price stayed within a specific index range for nearly 10 years means that the index corresponds to our economy. The KOSPI is currently near that level.

The more the stock price falls, the more investment sentiment deteriorates, causing prices to drop below their intrinsic value. This period usually ends quickly because the stock price deviates from its true value. Although there are opinions that the value of our stocks could be further damaged by successive interest rate hikes and economic recession, this should not be seen that way. The Asian financial crisis and the U.S. financial crisis are representative cases where stock values were severely damaged. In both cases, stock prices fell sharply with the crisis but returned to their original levels once the situation was resolved. These cases show that value damage is not easy.

The stock price has fallen to a level appropriate for our economy. Unless a financial crisis-level event occurs or our economic growth rate falls below -2% this year, further significant declines in stock prices are unlikely. Prices have already dropped by nearly 30%.

The most important thing now is to control one's mind. The more stock prices fall, the greater the fear investors feel. There is a higher chance of making the mistake of selling stocks at the bottom, swept away by emotions. I hope investors think of both rises and falls as part of the process that creates stock prices and keep a calm mind.

Lee Jong-woo, Economist

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