[Inside Chodong] Excessive Pessimism, Premature Optimism

[Image source=Yonhap News]

[Asia Economy Reporter Lee Seon-ae] After Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), clearly expressed his intention to tighten monetary policy further in his 'Jackson Hole speech,' the domestic stock market plunged into turmoil. Starkly divided forecasts emerged among domestic securities firms: 2050 VS 2800. These are sharply contrasting year-end predictions for the KOSPI index. The 2050-point forecast is somewhat 'pessimistic,' while the 2800-point forecast is somewhat 'optimistic.' Samsung Securities cited the fact that even with a conservative outlook on corporate earnings this year, the level would not deviate significantly from last year’s as the basis for the 2800-point forecast. They emphasized that the current market price level assumes a 35% decline in earnings compared to last year, suggesting the need to move away from excessive pessimism.

On the other hand, Daishin Securities also pointed to deteriorating corporate earnings as the reason why the KOSPI could fall to 2050 points. Daishin Securities noted that the economic shock from rising interest rates has yet to materialize. If a recession occurs, corporate earnings are bound to decline. Since Fed Chair Powell has clearly stated his willingness to accept a recession to curb inflation, they analyzed that considering the changes in the Institute for Supply Management (ISM) manufacturing index and the forecast changes in earnings per share (EPS), the market bottom would be around 2050 points.

The sharp divide between optimism and pessimism lies precisely in economic outlooks. Samsung Securities represents the optimistic camp, while Daishin Securities stands in the pessimistic camp, intensifying confusion among individual investors.

Investors are at a crossroads, uncertain whether to reduce their stock holdings anticipating a KOSPI decline or increase them expecting a rise. Investor sentiment is worsening, as evidenced by declining trading volumes. Fear is dominating the market. After the Chuseok holiday, the KOSPI opened on the 13th with a brisk rise of over 2%, but individual investors sold more than 1 trillion won worth of stocks in the KOSPI market in just one day. As the market rebounded close to the 2450 level, they sharply reduced their stock holdings, overwhelmed by fear. Meanwhile, the New York stock market plunged overnight amid fears that inflation will persist longer than expected. All three major indices experienced their largest single-day drop in two years and three months since June 11, 2020, during the early COVID-19 crisis. This was due to the Fed’s commitment to a more hawkish (monetary tightening-preferred) policy than the market anticipated, causing investor sentiment to freeze. Ultimately, after plunging following Powell’s 'Jackson Hole speech,' the New York market, which had been rebounding since the 6th, gave back a week’s worth of gains in a single day. The domestic market on the 14th is expected to remain engulfed in fear.

The optimistic camp says the stock market thrives on fear. Legendary Wall Street investor Peter Lynch said, "The success of investing depends on how long you can ignore the world’s pessimism." This might be a fitting adage for the current times. So, should pessimism be avoided? The essence of insurance companies is pessimism. Their business survives because pessimism exists. Believing in pessimism does not cause losses. Selling now to reduce losses is good. It is an opportunity to buy cheaper later. Even if you sell now and optimism proves correct with prices rising, you will not lose out. When the market is chaotic, both excessive pessimism and premature optimism should be approached with caution. Perhaps, even those who claim to be 'market experts' presenting sharply divided forecasts are doing the best they can.

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