Why Is the US Stock Market Struggling to Rebound?

[Asia Economy Reporter Song Hwajeong] The U.S. stock market has continued to weaken this year. Considering supply and demand conditions, it is expected that it will take time for market sentiment to reverse.

According to KB Securities on the 23rd, the Nasdaq Composite Index has fallen more than 14% from its all-time high of 16,057.40 recorded on November 19 last year, entering a correction zone. The S&P 500 index has dropped more than 7% compared to the end of last year. KB Securities researcher Kim Ilhyuk analyzed, "As interest rates steadily rose, growth stocks with high interest rate sensitivity underperformed, and the Nasdaq index, which has a high proportion of growth stocks, performed worse than the S&P 500. The S&P 500 also exceeded its maximum decline of 5.21% from its previous high since November 2020."

Speculative funds have started to decrease first. Recently, the balance of margin loans for U.S. stocks has declined for two consecutive months. Although it sharply dropped in July, raising market concerns, it soon increased significantly, showing strong buying demand. However, the year-over-year growth rate had already peaked at 71.6% in February last year. Researcher Kim said, "Looking at data since 1997, when the year-over-year change rate of margin loan balances exceeded 50% and then began to decline, the market subsequently experienced a significant drop. When speculative funds flowed in massively, the stock market rose strongly, but when speculative funds exited, the market underwent corrections." He added, "Moreover, margin loans can be forcibly liquidated due to margin calls when stock prices plunge, which can further amplify the decline."

Foreign investors have also turned to selling. Foreign buying of U.S. stocks peaked in June last year. Kim said, "Although the U.S. has a massive capital market and is not greatly influenced by external supply and demand, market volatility tends to increase when foreign selling intensifies. Around the end of QE2 in 2011, selling pressure caused major U.S. stock indices to fall sharply, and large-scale selling also occurred in 2015, during which two corrections were experienced."

The increasing decline is seen as evidence of tightening liquidity. Kim explained, "The most representative phenomenon when liquidity tightens is increased volatility and larger declines. When liquidity is abundant, strong bargain hunting limits the decline, but when liquidity expansion slows or contracts, bargain hunting weakens and demand driven by FOMO (Fear of Missing Out) also decreases."

Since a short-term bottom has not yet been confirmed, it seems that it will take time for market sentiment to reverse. Kim said, "One unique recent phenomenon is that although stock prices are falling, the VIX, the S&P 500 volatility index, is not surging. This is because the perception remains that there are no alternatives other than stocks, as bond yields rise and cryptocurrency prices plunge." He added, "Many investors are looking to confirm Q4 earnings and subsequent earnings forecasts, but even if somewhat lagging, supply and demand indicators used to gauge trends suggest that it will take time for market sentiment to reverse."