[Inside Chodong] To Investors Who Only Hear What They Want

[Asia Economy Reporter Lee Seon-ae] "It is reasonable to adjust the pace of interest rate hikes. (However) history strongly warns against premature policy easing. There is still a long way to go to restore price stability. We will continue the (monetary tightening) process until the job is done." After Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), made these remarks during a speech at the Brookings Institution think tank in Washington DC on the 30th of last month (local time), both the U.S. and domestic stock markets immediately rebounded. Investors cheered the expectation of a slowdown in the pace of rate hikes.

However, it seems investors who selectively listen only to what they want to hear have overlooked risk factors that could trap them. Although Chairman Powell raised the idea of slowing the pace of tightening due to concerns about over-tightening, he did not say that tightening would stop. Since he emphasized that "there is still a long way to go," the peak of the benchmark interest rate is still likely to be higher than expected. Earlier, Powell also stated that "the terminal rate could be higher." He reiterated this in the speech, clearly indicating that interest rates need to be higher than they are now. Currently, the U.S. benchmark interest rate is around 4.00% at the upper bound.

Powell emphasized, "We must start by acknowledging the reality that inflation is still too high," adding, "We need to raise rates to a sufficiently restrictive level to bring inflation back to the Fed's 2% target, and we expect ongoing increases to be appropriate." He also drew a line against expectations of a Fed policy pivot. This means that the Fed's tightening will continue into next year. For the time being, there is no brake on monetary tightening.

Following this trend, South Korea is also expected to continue raising its benchmark interest rate next year. The point to consider here is, even if the tightening cycle ends next year, how long the elevated rates will be maintained.

Given this, the appropriate stance for investors at this point is to be "cautious." The market should be viewed conservatively. At minimum, the stock market is expected to be influenced by the tightening cycle until the first half of next year. Yet, investors are already reacting to the "pace adjustment theory" by preemptively pricing in interest rate cuts that have not yet occurred.

One of the most important variables for the stock market next year is a recession. Since the tightening cycle is expected to continue and the possibility of facing recession variables is high, experts are calling for setting a lower bottom for the stock market. Professor Kim Young-ik of Sogang University Graduate School of Economics said that the positive factors of falling inflation and interest rates, which have not yet clearly appeared, are already reflected in stock prices, but since the negative factor of recession could also strike, investors should prepare for a larger correction.

Fearing a recession, major domestic companies are postponing investments and accumulating cash. The capital market is also cooling, with companies focusing more on survival than growth investments. This trend is evident in a recent survey conducted by the Federation of Korean Industries. Half of the major domestic companies either have no investment plans for next year or have not even set plans. The severe credit crunch makes it meaningless to devise investment scenarios for next year. The Korea Economic Research Institute forecasted that due to the deepening global economic slowdown and lack of domestic growth momentum, next year's economic growth rate will be only 1.9%, entering a full-fledged recession phase.

It is necessary to reflect on whether we have only listened to what we wanted to hear. A far from peaceful year is expected. Especially, ignoring recession warning signs is likely to lead to failure. Rather than cheering only for the "short-lived rally" caused by the pace adjustment theory, it is wise to take a step back and re-examine the market. It is time to once again engrave in our minds the old stock market adage, "There is no stock that beats the market."

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