Santa Rally Starts Despite Various Headwinds
Analysis Suggests Tapering Already Priced In
With Low Bond Yields
Few Alternatives to Stocks for Investment
Domestic Investors Likely to Increase US Stock Allocation
[Asia Economy Reporter Kim Suhwan] "It seems that the market has not been affected at all despite all the policies so far being factors that cause inflation."
Amid growing concerns about inflation, Tim Courtney, Chief Investment Officer of investment advisory firm Axential Wealth Advisors, made this assessment regarding the US stock market hitting an all-time high.
As the US stock market continues to hit record highs ahead of the Federal Reserve's (Fed) tapering (asset purchase reduction) announcement, attention is focused on the background and future outlook.
Recently, global financial markets including the US have been sensitive to supply chain crises, energy shortages, inflation concerns, and accelerated tightening signals from central banks worldwide. However, the US stock market has been continuing its bullish trend regardless.
Regarding this, Sean O'Hara, CEO of US ETF issuer Pacer, said in an interview with Yahoo Finance on the 2nd (local time), "What is happening now is not that surprising," adding, "The important question is whether this (stock market boom) is sustainable going forward or if bigger risk factors are approaching."
Tapering Already Priced In... "TINA Phenomenon"
The reason the US stock market continues to rise daily despite the imminent announcement of the Fed's Federal Open Market Committee (FOMC) regular meeting results is analyzed to be because tapering concerns have already been priced into the market. Greg Marcus, a manager at UBS, said, "The Fed has been signaling tapering for some time," indicating that the market was already prepared for tapering.
Before the November FOMC meeting, where tapering is expected to be officially announced, the US stock market had already undergone a correction in September. The Dow Jones Index fell by up to 5% compared to the previous month in September. This means that tapering concerns were already reflected, causing the market to adjust.
It is also pointed out that the fact that November to December has traditionally been a strong market period is a factor driving the stock rally. According to Bank of America (BoA), the US S&P 500 index has recorded gains in almost every November and December period since 1936.
Foreign media are also paying attention to the so-called TINA (there is no alternative to stocks) sentiment, which suggests that the US stock market's strength is due to the lack of alternative investment assets besides stocks. The Wall Street Journal (WSJ) diagnosed, "Currently, government bond yields remain low, so the stock market is rising as a reflection of this."
This means that in a low bond yield environment, funds are flowing into stocks, which offer higher returns, due to the TINA phenomenon.
Korean Retail Investors Likely to Increase US Stock Holdings
In response to this strong US stock market, domestic investors' demand for US stocks is also expected to expand significantly. While the Korean stock market has been flat recently, the US stock market continues to hit record highs, suggesting that Korean retail investors (Seohak Gaemi) may increase their overseas investment proportions.
Shinhan Investment Corp. recently released the '2022 Economic and Financial Market Outlook' report, stating, "In 2022, advanced markets (US stock market) are expected to outperform in terms of economy, earnings, and monetary policy stance," recommending the US as the top preferred country.
However, some experts emphasize that stock market correction risks should also be kept in mind. BoA analysts warned, "The stock market may have reached its peak," adding, "Especially, the dovish stance of central banks worldwide is also expected to peak soon, which is a factor that increases correction risks."
The WSJ reported, "Major central banks are concerned about high inflation recently and are pushing plans for interest rate hikes."
Market Focuses on Fed Chair Powell's Reappointment
Meanwhile, the market is paying attention to US President Joe Biden's decision on the next Fed chair.
The reappointment of Fed Chair Jerome Powell, whose term expires in February next year, is also a major variable affecting the stock market. Jason England, asset manager at global asset management firm Janus Henderson, said that if the Fed chair is replaced contrary to expectations, "market volatility will increase due to uncertainty about monetary policy."
In this regard, President Biden said at a press conference at the 26th United Nations Climate Change Conference of the Parties (COP26) on the same day, "I will announce the next Fed chair fairly and quickly."
Currently, the likelihood of Powell's reappointment is high. In a Bloomberg survey conducted from the 22nd to 27th of last month targeting economists, 79% expected Powell's reappointment.
Bloomberg explained that although Powell's reappointment remains likely, the response rate expecting Powell's reappointment has slightly declined compared to previous surveys due to recent controversies over stock trading by senior Fed officials. The expectation that current Fed Governor Lael Brainard will be nominated as the new chair was 13%. Brainard is currently the only Democrat on the Fed Board of Governors.
Next, 4% named Roger Ferguson, former CEO of the US Teachers Insurance and Annuity Association (TIAA), and 2% named Raphael Bostic, current President of the Atlanta Fed.
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