[Good Morning Stock Market] Increased Volatility Ahead of Chuseok... Should You Sell Stocks or Not?

[Asia Economy Reporter Oh Ju-yeon] As domestic and international stock markets have been undergoing corrections since mid-September, investor anxiety is also increasing. There is an analysis that the domestic stock market may stall ahead of the Chuseok holiday, which lasts from the 30th of this month to the 4th of next month.

However, the current market correction is a profit-taking process following the expiration of events centered on growth stocks in August and September, and the prevailing view remains that the market can continue to rise in the long term. Additionally, political uncertainty is highlighted ahead of the U.S. presidential election in November, but this is also diagnosed as a 'time-limited risk' with a defined end, drawing attention.

On the 25th, the KOSPI index opened at 2295.16, up 0.99% (22.49 points) from the previous trading day, as dealers were working in the Hana Bank dealing room in Jung-gu, Seoul. On the same day, the KOSDAQ index rose 1.36% (11 points) to 817.95, and the won-dollar exchange rate started at 1169.5 won, down 3.2 won from the previous trading day. Photo by Kim Hyun-min kimhyun81@

◆ Kim Yong-gu, Samsung Securities Researcher = The current domestic and international market correction can be seen as a product of the combined effect of the potential for further expansion of global political uncertainty related to the November U.S. presidential election and the preemptive caution of market investors regarding this.

According to past case studies, there is a clear inverse correlation between the gap in opinion poll support rates among leading presidential candidates and the VIX index, a volatility barometer of the stock market. In other words, the closer the election is, the more political uncertainty and market volatility intensify, and as one side gains a clear advantage, the related uncertainty and volatility gradually ease. Currently, Biden maintains a limited lead of about 7%, but considering the unpredictable final outcome, political uncertainty and market volatility are likely to further intensify with the final push in late October.

However, an additional point to keep in mind is that this risk is a typical time-limited risk with a defined end. Looking at the changes in domestic and international stock indices and the VIX index during the 60 days before and after the U.S. presidential elections in 2004, 2008, 2012, and 2016, there was a double burden of stock price weakness and increased market volatility before the election day, but after the election, the trend reversed, offsetting the previous impact entirely.

Since the essence of this risk is time-limited with a defined end and limit, the strategy should always favor holding rather than selling, and buying rather than waiting.

◆ Lee Kyung-min, Daishin Securities Researcher = Checkpoints during the holiday period include the first U.S. presidential debate on the 29th, Korean export data on October 1, U.S. and European PMI, U.S. ISM manufacturing index, and U.S. employment data on October 2 (local time). While fluctuations are expected depending on the results, in a phase of weakened investor sentiment, there is a tendency to be more sensitive to bad news than good news.

Good and bad news reflected in financial markets tend to be amplified beyond their actual impact. This often leads to entering phases of overheating or recession. Until the end of August, global markets and the KOSPI until mid-September showed sensitivity more to good news than bad news, resulting in increased overheating and valuation burdens. For the time being, the opposite phenomenon should be considered.

It is necessary to confirm the KOSPI's support level at around 2270 before the Chuseok holiday. This level is a turning point to gauge time and price corrections. If the index falls below this previous low, additional price corrections will be inevitable, and it would be advisable to delay buying timing further. By sector, maintaining or increasing weight in internet and secondary battery sectors upon further declines is expected to be reasonable. Conversely, it would be prudent to take a lighter position in semiconductor and automobile sectors, which have recently shown strength.

◆ Oh Tae-dong, NH Investment & Securities Researcher = Recently, concerns about entering a bear market have increased due to price corrections in domestic and international growth stocks. Entry into a bear market would occur if the economy contracts significantly again or if discount rates rise more sharply than earnings improvements. Although the global economy is slow, the worst phase has already passed, and U.S. bond yields decline whenever risk-off (risk aversion) sentiment occurs, acting as a kind of buffer.

Therefore, the essence of the recent stock market decline is judged to be a profit-taking process following the expiration of events centered on growth stocks in August and September. Given that the market capitalization to GDP ratio of the Korean stock market approached an all-time high in September, it will not be easy to surpass the August-September peak immediately. On the other hand, since low discount rates are maintained and abundant domestic stock purchasing funds are waiting, the additional decline is expected to be limited.

The KOSPI is expected to fluctuate within the 2200?2450 range while digesting the U.S. presidential election event and waiting for clearer signals of economic recovery.