[Weekly Market Outlook] Will the Economic Recession Suppress the 'January Effect' Optimism?

70% of US Economists Predict US Recession
Focus on US December Employment Data Release

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

[Asia Economy Reporter Lee Seon-ae] There is great interest in whether the "January effect" will appear in the domestic stock market during the first week of the new year. With investor sentiment revived by expectations that the U.S. Federal Reserve (Fed) will end its tightening in the first half of the year, the possibility of the January effect emerging is being discussed. However, since an economic recession is expected to overshadow these hopes, the prevailing analysis is that the January effect will be limited. The U.S. December employment data to be released this week is expected to be a key indicator in gauging the recession level, drawing attention.

On the 1st, securities firms mostly took a conservative view on the January effect in the domestic stock market this week. This is because the dominant forecast is that the global economic recession will intensify. In a Bloomberg survey of leading economists, 70% of respondents predicted a U.S. recession this year. Another reason for the gloomy outlook for the new year is the ongoing downward revision of corporate earnings ahead of the Q4 earnings announcements.

In this context, the U.S. December employment data to be released this week is a point of interest. Along with Gross Domestic Product (GDP), employment (unemployment rate) is considered one of the most important indicators when judging a recession. Employment and inflation are key indicators that influence the Fed's stance.

Lee Eun-taek, a researcher at KB Securities, said, "Employment is still coming out stronger than expected, which will add tightening pressure on the market, while inflation is coming out more positively than expected, which is likely to ease tightening pressure. Therefore, there may be a correction until mid-month, followed by a bottoming out after mid-month." Choi Yoo-jun, a researcher at Shinhan Investment Corp., also noted, "There is a general absence of buying in the stock market and concerns about further downside are at play. With the importance of the U.S. December employment data increasing, it is also a variable to watch whether buying at the early-year low will flow in."

However, there are also views that expect the January effect. The possibility that the Fed will end its rate hikes in February or March due to easing inflation could increase downward pressure on interest rates. Historically, the January effect has appeared quite often. According to Hyundai Motor Securities, the KOSPI rose 13 times since 2001 in January, with an average return of 0.9%. In particular, it is analyzed that the January effect is likely to become visible when the spread between 2-year and 10-year government bonds narrows. Lee Jae-seon, a researcher at Hyundai Motor Securities, explained, "The earliest possible end to the U.S. rate hikes could be February, and at the latest the March Federal Open Market Committee (FOMC) meeting. Therefore, if the downward pressure on rates is stronger than the upward pressure, the January effect can be expected."

Additionally, the inflow of buying into large tech stocks around the U.S. market close is another factor raising expectations. Seo Sang-young, a researcher at Mirae Asset Securities, pointed out, "There has been a rebound buying inflow centered on major large tech stocks, semiconductors, and electric vehicle sectors that experienced significant declines last year," adding, "This is expected to have a positive impact on the Korean stock market in the new year."

There is also a forecast that a stock market dominated by small and mid-cap stocks will be prominent for the time being. Since corporate earnings bottoms have not been confirmed, there is a high possibility that demand will concentrate on policy themes. Kim Byung-yeon, a researcher at NH Investment & Securities, explained, "During the period when earnings forecasts for large-cap stocks are being revised downward, small and mid-cap stocks tend to perform strongly. We consider sectors such as smart grid, media, content, as well as construction, defense, and nuclear power?areas with high policy visibility and manageable price burdens?as promising themes."

Key schedules to watch this week include ▲U.S. December unemployment rate ▲U.S. December nonfarm payrolls ▲U.S. December FOMC minutes ▲U.S. December Institute for Supply Management (ISM) manufacturing index ▲Korea December exports and imports ▲China December Caixin manufacturing Purchasing Managers' Index (PMI) ▲Europe November retail sales.