[Good Morning Stock Market] US Stocks Rise on Powell's Stronger 'Dovish' Tone and Expectations for Additional Stimulus

US Stock Market Rises Amid China Deleveraging Issues
Powell Boosts Expectations for Monetary Easing and Stimulus

Continued Pressure on Treasury Yields... "Increase in Sensitive Stocks Weight"

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] “There is no concern about inflation. It may take more than three years to reach the target.”

As Fed Chair Jerome Powell attended the monetary policy hearings in both the House and Senate to soothe the market, the U.S. stock market responded. With expectations that the ‘zero interest rate’ policy would be maintained for a long period and news that additional stimulus measures would be processed, the Dow Jones Industrial Average and the S&P 500 rose by 1.35% and 1.14%, respectively.

Despite Concerns over China’s Deleveraging, Moderate Monetary Policy and Stimulus Expectations Reflected in Market Rise

◆ Sangyoung Seo, Kiwoom Securities Researcher = The U.S. stock market showed a decline at one point due to China’s deleveraging issue, but Fed Chair Powell’s commitment to maintaining a continuous stimulus stance and news that a $1.9 trillion stimulus package would be processed in the House on the 26th positively influenced the market.

Fed Chair Powell has been emphasizing a continued dovish monetary policy. He stated, “The economy is still challenged, and we will use policy tools to the fullest extent until employment and inflation reach acceptable levels.” He firmly noted that it could take more than three years to reach the inflation target, significantly improving investor sentiment.

Among sectors, stocks related to economic normalization such as energy, industrials, leisure, and travel rose on stimulus expectations. Conversely, large tech stocks fell due to renewed regulatory concerns. The domestic market’s sharp decline the previous day was analyzed as a combined effect of China’s deleveraging issue and valuation pressures. While the China issue negatively impacted the broader Asian market, the Fed’s moderate monetary policy and expectations for stimulus processing have raised hopes for a market rise.

The Fed’s Reduction in TIPS Purchases Should Be Seen as a Signal of Asset Reduction

◆ Yeo-sam Yoon, Meritz Securities Researcher = The U.S. 10-year Treasury yield has sharply risen to the 1.3% range this month. The reasons for rising yields can be summarized as the burden of bond supply due to U.S.-centered expanded fiscal spending, upward revisions of major countries’ growth forecasts, and upward revisions of inflation expectations. As yields rise to a considerable level, growth stocks have shown vulnerability to the rate increase. Considering borrowing costs and the degree of economic normalization, this has become a burden on high-valuation growth stocks.

However, yields driven solely by inflation expectations will eventually return to a moderate pace. The market believes that central banks, which hold the key to liquidity, can withdraw easing policies due to the recovery of inflation expectations and rising market rates, but they do not seem to reduce their preference for risk assets. This means that rising inflation expectations and market rates do not trigger a fundamental change in liquidity conditions.

The key is the real interest rate that can stimulate liquidity. Ultimately, the focus should be on whether the Fed reduces its purchases of Treasury Inflation-Protected Securities (TIPS). TIPS are government bonds whose principal and interest adjust according to inflation, essentially products that bet on inflation. If the Fed, a major player in the TIPS market, reduces its purchases, the real interest rate represented by TIPS yields will rise, which can be seen as a signal that the Fed is partially withdrawing its high-pressure economy stance. At this point, since the Fed is maintaining its TIPS purchase stance, there is no need to worry excessively about rising yields.

Time to Lower Growth Stock Weight and Increase Cyclical Stock Weight

◆ Daejun Kim, Korea Investment & Securities Researcher = The KOSPI’s period of adjustment will continue. Although the global economic recovery and improvement in earnings momentum are positive, the persistent pressure from rising interest rates makes it highly likely that the index will lose directional clarity.

The most important market response is sector weight adjustment. Assuming the interest rate rise continues, the weight of growth stocks sensitive to discount rates should be partially reduced. At this point, preference for undervalued cyclical stocks is increasing.

As major companies finish announcing their Q4 earnings, investors should focus on the movements of interest rates and commodity prices. In a phase of gradual interest rate increases, energy, industrials, financials, and materials sectors have shown superior returns. Recently, the U.S. Texas cold wave has added supply concerns, sustaining the strength of oil and copper prices. Therefore, increasing exposure to energy and materials sectors, which can benefit from this, is necessary.

The green energy sector should be approached from a long-term perspective. Signs indicate that the Biden administration’s green policies are about to be fully implemented. A provisional social cost of carbon (SCC) is expected to be announced, which will serve as a basis for various environmental regulations. Considering the U.S. government’s policy stance, the growth trend in the green theme remains valid, but due to increased volatility, a long-term approach is advisable.