Expectations for Santa Rally Called by Powell... Securities Industry Says "This Year is Santa's Sabbatical"

▲ Jerome Powell, Chair of the U.S. Federal Reserve (Fed) [Image source=Yonhap News]

[Asia Economy Reporter Kwon Jae-hee] As December begins and with the surprise remarks from Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), expectations for a 'Santa Rally' have been rising, but it is unlikely that this year's Santa Rally will materialize. Interest rate burdens, geopolitical risks, and valuation pressures due to downward revisions in corporate earnings are cited as factors hindering the KOSPI's rise. However, amidst these challenges, advice is emerging to focus on portfolios centered on dividends and defensive stocks, as well as risk management.

According to the Korea Exchange on the 2nd, the KOSPI index closed the previous day up 0.30% (7.31 points) at 2479.84. On that day, the index opened at 2501.43, up 1.17% (28.90 points) from the previous trading day, touching the 2500 level for the first time in about three months since August 19. Compared to the late September low (2134.77), this represents a rebound of nearly 17%.

As the KOSPI showed strength, expectations for a 'Santa Rally' have also grown. A Santa Rally refers to a phenomenon where the market experiences a brief rise around Christmas and the New Year, often occurring without any clear positive news.

The spark for the Santa Rally expectations was Powell's remarks. Ahead of the Federal Open Market Committee (FOMC) meeting scheduled for the 13th-14th (local time), Fed Chair Powell made his final public comments, stating, "We will not lower interest rates soon," but also added, "We do not want excessive tightening." Regarding the terminal interest rate level, he only mentioned that "it may need to be higher than the September forecast," softening the tone. Contrary to initial expectations, Powell's comments were dovish, quickly reviving market sentiment toward risk assets.

However, the securities industry largely forecasts that a Santa Rally will be difficult this year. The biggest factor is interest rates. With the final FOMC meeting on the 14th still pending, the probability of a 50 basis point hike remains high. The Russia-Ukraine war and protests against Xi Jinping's retirement in China are also considered burdens on our stock market. As a result, foreign funds flowing into our market instead of China have increased valuation pressures on the KOSPI, which is expected to add to the burden for further gains.

The securities industry advises constructing portfolios focused on dividends and defensive stocks and emphasizing risk management. Among high-dividend stocks, those with strong earnings attractiveness and some that may benefit from year-end and early-year policies are worth considering. Bank stocks are also worth examining.

Lee Eun-taek, a researcher at KB Securities, forecasted, "Bank stocks will show strength in a phase where the pace of interest rate hikes slows and concerns about economic contraction diminish."

Han Jae-hyuk, a researcher at Hana Securities, advised, "With Santa Rally expectations fading, the stock market at the end of this year should continue to focus on risk management as before."