[Beginner's Guide to Stock Market] Are There Four Seasons in the Stock Market Too?... The Unwelcome Guest 'Earnings Recession'

Editor's Note[Beginner Investor's Guide] is a smart investment guide for 'Beginner Investors (Ju-rini, a combination of stock and child)'. We will kindly and easily explain stock stories that are unfamiliar to beginner investors.

[Asia Economy Reporter Kwon Jae-hee] Recently, if you have read stock-related articles, you might have come across the term 'reverse earnings market' at least once.

This concept appears in the book written by Japanese technical analyst Kunio Uragami. Uragami viewed the stock market as cyclical like the seasons.

The core idea is that financial markets cycle through financial market phases, earnings market phases, reverse financial market phases, and reverse earnings market phases, depending on the relationship between interest rates and corporate earnings.

So, where is our current stock market in the four seasons, and which stock groups are the leaders in this phase? Let's find out.

Are There Four Seasons in the Stock Market?

Uragami defined the stock market in four phases:

'Financial market phase' where stock prices rise due to abundant liquidity,

'Earnings market phase' where stock prices differentiate based on corporate earnings,

'Reverse financial market phase' where rising interest rates cause stock prices to fall,

and 'reverse earnings market phase' where worsening earnings cause stock prices to plummet to the bottom.

First, the financial market phase corresponds to 'spring' among the seasons. Macroeconomic indicators may be poor, but liquidity is abundant due to low interest rates.

It is an optimal time to raise funds and purchase stocks, and it is also a period when government financial easing policies and recovery in the economy and corporate earnings are expected.

The earnings market phase corresponds to the booming 'summer' of the stock market.

It is a period when economic measures gradually take effect and the private sector is activated.

After the economic expansion phase, inflation surfaces and the market turns bearish in the autumn, the 'reverse financial market phase' arrives.

Uragami points out that in this phase, corporate profits are still increasing, so investors should be cautious. He says the following:

"In the reverse financial market phase, which starts due to tightening and external shocks, many investors mistakenly interpret falling stock prices as a buying opportunity because they feel stocks are cheap, but they later realize that buying after prices fall further was a wrong choice."

Finally, the reverse earnings market phase is often compared to the cold winter when chilly winds blow. At this point, interest rates, earnings, and stock prices all decline.

If You Know Which Season It Is, The Money-Making Stocks Are Determined

Uragami judges stocks based on two criteria: asset value and growth value.

In the financial market phase (spring), interest rate-sensitive stocks.

In the earnings market phase (summer), materials and cyclical industries.

In the reverse financial market phase (autumn), high-profit small and mid-cap stocks.

In the reverse earnings market phase (winter), large-cap blue-chip stocks.

[Image source=Yonhap News]

He recommended investing in leading stocks during the financial and earnings market phases (spring and summer), and in stocks less affected by economic cycles during the reverse financial and reverse earnings market phases (autumn and winter).

The financial market phase (spring) is a liquidity-driven market with low interest rates, so money will flow into the stock market, and infrastructure investment will be active due to easy financing.

Representative leading stocks in this phase include bank stocks, securities stocks, insurance stocks, electric power and gas, airline stocks, and construction stocks.

What are the representative materials and cyclical industries in the earnings market phase (summer)? Since it is a period of economic boom, goods will sell well, and thus the materials industries involved in producing those goods will perform well.

Typical materials industries include chemicals, steel, cement, and non-ferrous metals.

Processing and selling these materials, semiconductors, automobiles, electrical and electronics, and precision instruments will also prosper.

In the reverse financial market phase (autumn), which marks the beginning of a bear market, stock prices fall before earnings do, causing the price-to-earnings ratio (PER) to decrease.

The price-to-earnings ratio (PER) is the stock price of a specific company traded in the market divided by its earnings per share, and it is the most basic indicator for evaluating corporate value.

A lower PER is considered undervalued, and it is often judged that the stock price is likely to rise in the future.

In other words, in the reverse financial market phase, you should look for blue-chip stocks whose prices have fallen significantly.

In the recession phase, the reverse earnings market phase, defensive stocks become the market leaders.

Representative defensive stocks include food and beverages, telecommunications, and dividend stocks.

People do not cancel their mobile phones or reduce their three meals a day to two just because the economy is in a downturn.

So, Where Is Our Stock Market Now?

The securities industry believes the stock market is moving out of the reverse financial market phase and entering the reverse earnings market phase.

Consumer Price Index (CPI) surprises and relief in monetary policy are seen as signals that the reverse financial market phase, which was sensitive to monetary policy, has ended.

However, there is also advice that excessive expectations for interest rate freezes or cuts due to relief in monetary policy should be avoided.

Uragami often said, "The peak lasts three days, the bottom lasts 100 days."

As this saying implies that booms are short and recessions are long, thinking that interest rates will be cut immediately and a liquidity-driven market will unfold just because inflation seems somewhat subdued is overly optimistic.

It may be time to prepare for the cold winter ahead.

Kunio Uragami, a world-renowned analyst known on Wall Street, is rare among Asians.

We conclude by introducing his 15 investment principles.

We support the wise investments of all beginner investors today as well.