[Good Morning Stock Market] Global Uncertainty Eases... Ultimately a Momentum Market

On the 2nd, when the KOSPI index surpassed the 3100 mark again during the session, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Moon Honam munonam@

[Asia Economy Reporter Lee Seon-ae] Major indices on the New York Stock Exchange rose as expectations for economic stimulus measures increased and concerns over overheating in certain stocks like GameStop eased. On the 2nd (local time) at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average closed at 30,687.48, up 475.57 points (1.57%) from the previous session. The Standard & Poor's (S&P) 500 index rose 52.45 points (1.39%) to 3,826.31, and the tech-heavy Nasdaq index gained 209.38 points (1.56%) to close at 13,612.78.

◆ Hana Financial Investment: "Momentum Market" = Polarization of earnings by stock has appeared, and the expansion of stocks with improved earnings has not occurred. Compared to the usual flurry of upward earnings revision reports at the beginning of the year, this year the number of stocks with upward earnings revisions has actually decreased. Overall earnings momentum is weakening, highlighting the scarcity of earnings again. Recently, due to this influence, a market led by similar leading stocks as last year has appeared. Since there are few alternatives to stocks with improved earnings, only those with an advantage in earnings are receiving concentrated attention. The highest-performing styles this year are the top 20-day price deviation (+13.8%) and top 60-day price deviation (+12.0%). The most efficient factor for predicting future stock prices has been how much the price has risen. Other high-performing styles include 3-month earnings momentum (+8.5%) and 1-month target price upward revision (+6.4%). Most of these styles are related to 'momentum.' If the current earnings trend continues into the first quarter earnings season, a situation similar to last year's 'the winners keep winning' market may persist throughout the first half of the year.

The recent sustained net buying by individuals is also positive for earnings stocks. This is because the trend of individual net buying and the performance of the earnings momentum (3M) factor show a very high correlation. This also indicates that the target of individual buying is earnings stocks. Additionally, sentiment is also allowing for a leading stock market. Strong safe assets have appeared, making panic unlikely, but strong risk appetite is also not emerging.

Lee Kyung-soo, a researcher at Hana Financial Investment, said, "Strong safe assets make panic unlikely, but strong risk appetite is also not appearing, implying that foreign investors' net buying will stagnate," adding, "Ultimately, individuals will lift only earnings-improving stocks, resulting in a rich-get-richer and poor-get-poorer market with the index trending upward."

◆ Hi Investment & Securities: "Concerns over Global Stock Price Correction Ease" = The recent causes of global stock price corrections, including in the U.S., were partly due to the somewhat excessive speed of price increases over a short period and the limited realization of some excess liquidity bursts triggered by GameStop. In particular, GameStop introduced tension into the stock market as a new hegemony struggle between individual investors and hedge funds. Another trigger for stock price correction was the risk of liquidity tightening in China. The People's Bank of China's liquidity absorption led to a sharp rise in short-term market interest rates, sparking liquidity concerns not only in China but also in neighboring countries. Another concern was the increased uncertainty over the passage of additional stimulus bills by the Biden administration, raising fears of economic slowdown. Lastly, the resurgence of COVID-19 and the slow pace of vaccination caused economic indicators to weaken, acting as a negative factor for the stock market.

Fortunately, the four concerns that triggered the global stock price correction are easing. First, concerns over liquidity tightening in China have significantly eased. Reflecting this, the 7-day repo (RP) rate fell sharply by about 96 basis points to 2.2294% as of the 2nd compared to January 29. This is clearly different from the credit crunch in China in 2016, and the recent short-term rate surge is interpreted as a preemptive measure by the People's Bank of China to curb stock market overheating.

Uncertainty related to the Biden administration's additional stimulus package is also somewhat easing. After meeting with Republican lawmakers, President Biden emphasized, "No modification of the original plan can affect the urgent needs of the people," showing strong determination to implement the $1.9 trillion additional stimulus. Although uncertainty over congressional approval has not been completely resolved, considering President Biden's determination and the Blue Wave situation, the likelihood of the additional stimulus passing Congress is high.

Park Sang-hyun, a researcher at Hi Investment & Securities, said, "The strengthening of economic recovery momentum supported by policies and expanded vaccination will defend against occasional negative factors that could trigger stock market instability," adding, "While serious risk factors that could disrupt the financial market's trend should be watched, it is still a time to focus on economic recovery momentum."