[Good Morning Stock Market] US Stock Market Shaken by COVID-19 and Interest Rate Cut Caution Remarks

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Minji Lee] The U.S. stock market closed lower amid growing concerns over the novel coronavirus disease (COVID-19). As confirmed cases rapidly increased outside China, including in South Korea and Japan, worries grew that this would negatively impact the overall Asian economy. Additionally, the U.S. Federal Reserve's (Fed) cautious stance on interest rate cuts further amplified the market decline.

◆ Bongju Kang, Researcher at Meritz Securities= The Korean stock market has been stagnant since its rebound in early February. The rise in COVID-19 cases appears to have dampened investor sentiment toward risk assets. Institutional investors, who led the market rebound in the second half of last year, have net sold over 7 trillion won since the beginning of the year. Foreign investors also net sold about 1.5 trillion won after the KOSPI rebounded to the 2250 level in mid-January. Considering the increase in short selling and corporate earnings weakness, the KOSPI is likely to trade sideways around the 2200 level in the short term.

This year, large technology stocks have been at the center of the U.S. stock market's rise. The IT sector within the Standard & Poor's 500 (S&P 500) has risen 10.6% since the beginning of the year. Even after the COVID-19 outbreak intensified, the IT sector, along with defensive sectors such as real estate and communication services, has recorded top returns, solidifying its position as a market-leading sector.

The most effective investment strategy to respond to the domestic market downturn is to invest in the IT sector, which is leading the market. This means focusing on stocks with significant improvements in 2020 earnings and return on equity (ROE) and maintaining upward price momentum. Samsung Electronics, SK Hynix, Samsung SDI, Naver, Kakao, and NCSoft have seen strong foreign buying despite growing COVID-19 concerns and unrelated to the recent market decline. Even if the KOSPI falls further, these stocks are expected to maintain relative strength.

◆ Du-eon Kim, Researcher at KB Securities= The U.S. Federal Open Market Committee (FOMC) meeting in March is expected to keep the benchmark interest rate unchanged. According to the January FOMC minutes, the current monetary policy was deemed appropriate for improving the U.S. economy and inflation. Although some members advocated for additional rate cuts, the dot plot remains largely unchanged from December, indicating a low likelihood of rate cuts. The three main threats to the U.S. economy currently are a hard Brexit, potential military conflict between the U.S. government and Iran, and COVID-19. However, none of these risks are expected to significantly impact the March FOMC meeting. A hard Brexit is the least likely Brexit scenario, and the U.S. plans to impose economic sanctions rather than military action against Iran. While COVID-19 may have a significant impact on the Asian economy, if its spread is contained, it is unlikely to greatly affect the U.S. economy, which is more domestically driven.