[Good Morning Stock Market] Concerns Over Weak Economic Indicators... Will KOSPI's Uptrend Stall?

US Stock Market Falls for 2 Consecutive Trading Days
Weak Economic Indicators, Concerns Over Russia's Energy Weaponization Policy

Economic Recovery Momentum Stalls... Time to Reach Inflection Point

[Asia Economy Reporter Minji Lee] Due to the decline in the US stock market, the KOSPI is expected to show weakness on the first trading day of April. On March 31 (local time), the Dow Jones Industrial Average fell by 1.56%, while the Nasdaq and S&P 500 indices dropped by 1.54% and 1.57%, respectively. Amid ongoing concerns about economic slowdown, the US stock market has shown a two-day decline, leading some to predict that it has entered a correction phase.

The US stock market declined the previous day due to prominent economic concerns caused by China’s extension of the Shanghai lockdown and decreased real income and consumer spending amid high inflation. Real disposable income decreased by 0.2% compared to the previous month, marking seven consecutive months of decline, and real personal consumption expenditures fell by 0.4%, indicating a contraction in consumption.

Russia’s energy weaponization strategy also influenced the stock market decline. Russian President Putin’s final signing of a presidential decree requiring gas payments to be made in Russian rubles imposes obligations on Western companies, which burdens risk asset preference sentiment. Putin’s decision came as Western countries intensified sanctions, including excluding Russia from the Society for Worldwide Interbank Financial Telecommunication (SWIFT). This has acted as a catalyst for the ruble’s appreciation. With European countries, including Germany, holding less inventory than before, if Russia halts gas supply, the economic slowdown in related countries is expected to accelerate rapidly.

The decline in the US stock market burdens the domestic stock market. Furthermore, the expectation that South Korea’s March exports will slow to 17.5% growth from the previously announced 20.6% growth last month is also negative. A slowdown in growth rate could trigger downward revisions in corporate earnings estimates. Considering these factors, the domestic stock market is expected to start lower.

Opinions are divided on a recession following the inversion of the US short- and long-term interest rate spread. Some express concern that the inversion, even if temporary, signals a future recession, while others believe it is premature to conclude so. This reflects a confusing investment environment.

Currently, judging from economic indicators and related sentiment alone, it is difficult to determine whether a recession will occur, but it is clear that the economy is on the verge of entering a slowdown phase. In most countries, the growth rate of leading economic indicators has shown a clear downward reversal since mid-last year. When assessing cyclical economic indicators, a phase change is confirmed if signals in the same direction occur for three consecutive months after a directional shift. South Korea’s March export indicator is expected to be lower than February’s growth rate.

Export momentum determines the direction of our economy, which is highly dependent on external demand. While there are various expectations related to the new government’s launch and the so-called ‘reopening demand’ following the peak of the COVID-19 pandemic, it is expected that the economic direction converging with export momentum slowdown will not be reversed. Although base effects and Omicron impacts should be considered, the economic improvement trend has shown signs of stalling, and the leading index has declined for eight consecutive months, indicating that the economy is approaching a turning point. Since economic trends determine corporate earnings trends, the future investment environment is expected to be bleak.

Four factors can be summarized as triggers for the US stock market correction: rapid short-term rise, deteriorating expectations for the 5th peace talks between Russia and Ukraine, recession concerns due to inversion of short- and long-term interest rates, and caution ahead of March employment data. Among these, the direct trigger for the correction was concerns over the rapid short-term rise.

The S&P 500 index rose 11% over 11 trading days since March 15. This is the longest rally since October last year and has started to retest the previous high formed in early February this year. Since the previous high can now act as a support level, if a correction occurs in the US stock market, it can be interpreted as a natural consolidation phase.

The Ukraine situation is expected to have limited impact on the stock market in April as military conflict is expected to cease through Ukraine’s NATO non-membership and declaration of neutrality. Recession concerns caused by the inversion of short- and long-term interest rates should be considered in light of the fact that they did not occur during the early phase of rate hikes. Although March employment data is expected to be weaker than the previous month, there is likely to be no disagreement on the interpretation of a solid labor market given that full employment has been achieved. Considering this, if a consolidation phase occurs, it should be viewed as an opportunity to increase weighting in growth stocks with an eye on stock market gains in the second quarter.