[The Era of Ultra-Tightening] Most Global Stock Markets Rose During Rate Hike Periods... But This Year Is Uncertain

Interest Rate Hike = Perceived Economic Boom
Recent Inflation Driven by Supply Chain Issues
Many Variables Including Geopolitical Crisis

If Fed Implements Rapid Rate Policy
High Risk of Economic Recovery Slump
Concerns Over Negative Impact on Corporate Earnings

[Asia Economy reporters Seon-ae Lee, Hyun-woo Lee, Min-ji Lee] Since the 1990s, during the four periods of interest rate hikes, both the US and domestic stock markets have shown a trend of steady growth. This is analyzed as a result of improved corporate earnings driven by economic recovery. Looking at the interest rates and stock indices over the past 30 years, the interest rate graph and the KOSPI graph moved in similar trends. Will the same pattern appear this year?

◆ Strong Bull Markets in US and Korea Stock Markets After Interest Rate Hikes

During the first interest rate period in February 1994, the KOSPI fell 4.29% as investor sentiment froze. However, by the end of that year, it rose by 7.01%. In the next period, from June 30, 1999, the KOSPI rose 8.05% in one month and recorded a 14.55% increase by the end of the year.

From the end of June 2004, the KOSPI fell 5.23% over one month but rebounded to rise 16.21% by the end of that 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% over one month but recorded a 27.65% increase by the following year. Although the magnitude of the comparative increase varies depending on the period chosen, 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 interest rate hike period from February 1994 to December 1995 began after an eight-year recession caused by the chain bankruptcies of US savings and loan associations due to excessive mortgage loans in 1986. At that time, the benchmark interest rate rose from 3% to 6%, and during this period, the S&P 500 index surged 27.83%.

From May 1999 to May 2000, when interest rates were further raised, the S&P 500 index rose 5.58%. During the interest rate hike period from June 2004 to June 2006, which marked the recovery phase after the IT bubble recession, the index rose 14.67%. The most recent interest rate hike period from December 2015 to December 2018 saw the strongest index rise since overcoming the 2008 global financial crisis. The S&P 500 index rose from 2079.51 to 2790.37 during this period, a 34.18% increase.

Daishin Securities Research Center analyzed that "in past interest rate hike phases, global stock markets, including the domestic market, mostly showed an upward trend." They interpreted the interest rate decline period as an economic downturn, during which stock markets also fell, while the interest rate hike period was seen as an economic boom, during which stock markets rose. This is because interest rates are often raised when the economy improves, and market adjustments usually occur in advance after the announcement of hikes.

◆ Economic Recovery Still Weak... This Time Could Be Different

However, there are many analyses suggesting that this interest rate hike may differ from the past. The upcoming interest rate hike period faces many variables such as supply chain issues due to the COVID-19 aftermath and geopolitical crises, leading to ongoing debates about the timing and magnitude of hikes. Although the US Consumer Price Index (CPI) hit a 40-year high, the dominant analysis is that the economic recovery remains weak.

Therefore, it is uncertain whether the same phenomenon of stock markets rising on expectations of economic recovery during past interest rate hikes will occur this time. Ryan Sweet, senior economist at Moody’s, said in an interview with The New York Times (NYT), "The current inflation is due to energy price surges caused by geopolitical crises and supply chain disruptions from COVID-19, and it is difficult to say that economic recovery is strong yet." He added, "There is concern that if the US Federal Reserve (Fed) implements overly aggressive interest rate policies, the economic recovery could be derailed."

If the global economy slows down, corporate earnings will naturally deteriorate. Goldman Sachs recently lowered its US growth forecast for next year from 4.2% to 3.8%, citing concerns over Omicron, and also cut the Q4 growth forecast from 3.3% to 2.9%.

Domestic companies’ expected earnings this year are not bad. According to financial information provider FnGuide, KOSPI-listed companies are expected to earn operating profits of 252 trillion won this year, about 9% (20 trillion won) higher than the 2021 forecast of 231 trillion won. Although corporate profit growth is expected to continue this year, considering that profits last year increased by 62% compared to 2020 (142 trillion won), the growth rate is significantly slowing. This suggests that corporate earnings, which have been the driving force behind stock market rises, may not be able to support the market this time.