[Era of Ultra-Tightening] Although Immediately Hindered... KOSPI Rose During Every 30-Year Interest Rate Hike Period

[Asia Economy Reporters Lee Seon-ae and Lee Myung-hwan] When the base interest rate rises, does the KOSPI index fall or rise? The answer found during past interest rate hike periods is 'rise.' Of course, from a short-term perspective, the index experiences volatility and tends to decline. This is why investors' anxiety intensifies. During interest rate hikes, the fear that risk assets like the stock market will weaken causes investment sentiment to freeze. However, data from the past 30 years shows that the index recovered and followed an upward trend. The base interest rate and the stock market formed a positive correlation.

According to the Korea Exchange and the financial investment industry on the 11th, over the past 30 years, during periods of interest rate hikes, the domestic stock market experienced short-term volatility such as declines and sideways movements but eventually recovered and showed positive returns. The interest rate graph and the KOSPI index graph moved in similar trends.

In the first interest rate period in February 1994, the KOSPI fell 4.29% in one month as investment sentiment froze. However, by the end of that year, it rose by 7.01%. In the next period starting June 30, 1999, the KOSPI rose 8.05% in one month and recorded a 14.55% increase by year-end. From the end of June 2004, the KOSPI fell 5.23% in one month but rebounded to rise 16.21% by the end of the year. Compared to the first trading day of June, the year-end increase reached a remarkable 75.84%. On December 16, 2015, the KOSPI fell 2.80% in one month but recorded a 27.65% increase by the following year. Although the magnitude of the comparative increase varies depending on the period considered, it is important to note that an upward trend was drawn. Especially on an annual basis, the stock market's upward curve is clearly visible.

The Research Center of Daishin Securities analyzed, "During past interest rate hike phases, global stock markets, including the domestic market, mostly showed an upward trend."

It is analyzed that the period of falling interest rates was seen as an economic recession, during which the stock market also declined, while the interest rate hike period was viewed as an economic boom, during which the stock market showed an upward trend. This is because interest rates are often raised when the economic condition improves, and usually, market adjustments occur in advance after the announcement of hikes.

Ultimately, over the past 30 years, during interest rate hike periods, economic cycle recovery and corporate profit growth occurred, resulting in a positive correlation between interest rates and the index. Yang Hae-jung, a researcher at DS Investment & Securities, explained, "Since the financial crisis, the KOSPI's trend has shown a cycle very similar to that of exports. This phenomenon occurred because exports and KOSPI growth (sales increase) are highly correlated," adding, "Even in 2016, when concerns about tightening were reflected, exports rebounded and corporate profits increased, and the KOSPI rose following this trend."

Kim Jung-won, a researcher at Hyundai Motor Securities, said, "Analyzing the correlation between the economy, the dollar, and the stock market helps find the reason why risk assets like stocks rose during past interest rate hikes," and explained, "During the interest rate hike period starting in December 2015, emerging markets excluding China recorded high economic growth rates, and since the global economy was in a recovery phase, the safe-haven dollar weakened, leading money to flow into risk assets like stocks rather than safe assets."

So, what will the domestic stock market look like during this current interest rate hike period?

In the short term, adjustments and sideways movements are inevitable. The Federal Reserve's (Fed) interest rate hike schedule is expected to start earlier than initially anticipated, and the forecast for the magnitude of hikes is also being revised upward, so the interest rate hike cycle is expected to begin as early as March.

Park Hee-chan, a researcher at Mirae Asset Securities, said, "When signals of interest rate hikes emerge, there can be a sharp drop in stocks of companies facing valuation burdens and growth slowdown concerns, and overall, the stock market may maintain a correction phase," emphasizing, "A market correction does not necessarily mean prices will fall, but depending on the intensity of economic slowdown, such a scenario could unfold, so it is important to closely monitor economic momentum, especially recent signs of consumption slowdown."

The Research Center of Meritz Securities stated, "Current stock market volatility occurs at policy inflection points. Compared to before, the total liquidity is larger, and concerns that the Fed's number and strength of rate hikes may be stronger than market expectations are causing volatility," adding, "Since it takes time for market expectations to adjust according to policy, unstable market trends are likely to continue until the Fed's policy outline becomes clear."

However, there are also views that concerns about excessive tightening are exaggerated. The Research Center of Mirae Asset Securities predicted, "Since the Fed changed its monetary policy framework in 2020 after the effective excessive tightening mistake in 2018, the risk of a Fed-driven bear market like in 2018 is considered low."

The Research Center of NH Investment & Securities also forecasted, "The monetary tightening pursued by the Fed is seen as a phase to normalize excessively loosened liquidity rather than to build liquidity."

The early correction of the domestic stock market in January due to concerns about interest rate hikes may also serve as a mechanism to somewhat ease future volatility. The KOSPI and KOSDAQ indices fell by 10.55% and 15.58%, respectively, in January. Investors' risk-asset avoidance sentiment was excessively amplified due to the Fed's tightening of monetary policy to curb inflation that surged after the COVID-19 pandemic, leading to a sharp correction.