[Good Morning Stock Market] US Stock Market's Biggest Drop in 2 Years... "Additional Decline in Korean Stock Market Is Limited"

Following the plunge in Asian stock markets due to fears of a U.S. economic recession, the New York Stock Exchange also experienced a sharp decline on the 5th (local time). Securities firms analyze that the domestic stock market is more likely to rebound rather than fall further on the 6th.

[Image source= Xinhua News Agency]

At the New York Stock Exchange (NYSE), the Dow Jones Industrial Average, which focuses on blue-chip stocks, closed at 38,703.27, down 1,033.99 points (2.6%) from the previous trading day. The S&P 500, centered on large-cap stocks, fell 160.23 points (3%) to 5,186.33, and the Nasdaq dropped 576.08 points (3.43%) to 16,200.08. The Dow and S&P 500 indices recorded their largest declines since September 13, 2022, nearly two years ago.

Concerns over a recession triggered by weak U.S. employment data, global capital outflows due to the unwinding of yen carry trades, and fears of an artificial intelligence (AI) bubble acted as negative factors. Additionally, rising risks of full-scale war between Israel and Iran further dampened investor sentiment.

One of the causes of the sharp decline was the July employment report released last week, which showed nonfarm payrolls increased by 114,000. The unemployment rate was 4.3%. The employment increase fell significantly short of the forecast of 176,000, and the unemployment rate was higher than the expected 4.1%. As a result, some argued that the U.S. Federal Reserve (Fed) should urgently cut interest rates. There is also speculation about a 'big cut' of 0.50 percentage points in the benchmark interest rate next month.

However, concerns about a recession were partially eased by news of improvement in the U.S. service sector. The Institute for Supply Management (ISM) reported that the July non-manufacturing Purchasing Managers' Index (PMI) was 51.4, up 2.6 points from 48.8 in the previous month. A PMI below 50 indicates economic contraction, while above 50 signals expansion.

Kim Seok-hwan, a researcher at Mirae Asset Securities, explained, "In the pre-market, Nvidia's stock price plunged 15% compared to the previous day, highlighting the significant decline in major companies. However, after the market opened, the July ISM service PMI exceeded market expectations, partially alleviating concerns about economic slowdown."

The Morgan Stanley Capital International (MSCI) Korea Index Exchange-Traded Fund (ETF) fell 5.4%, and the MSCI Emerging Markets Index ETF dropped 2.8%. Eurex KOSPI 200 futures rose 3.8%. Securities firms analyzed that the domestic stock market has approached bottom levels amid the sharp decline.

Researcher Kim Seok-hwan said, "In past stock market crises, the 12-month forward price-to-book ratio (PBR) of the KOSPI 200 index at 0.8 times has often shown significant support. Applying this to the KOSPI index, the area around 2,400 points corresponds to a PBR of 0.8 times." He added, "With the 12-month forward PBR at 0.81 times following yesterday's sharp drop, it is necessary to approach the market with a focus on forming a 'short-term bottom' and a rebound."

Heo Jae-hwan, a researcher at Eugene Investment & Securities, explained, "The KOSPI's 12-month trailing PBR has fallen to 0.88 times, but except for the 0.67 times during the COVID-19 period, the KOSPI PBR bottom has formed between 0.82 and 0.86 times. Therefore, the possibility of a significant further decline in stock prices is low."

Han Ji-young, a researcher at Kiwoom Securities, said, "The KOSPI's rate of decline ranks fifth historically, matching price movements during major crises such as the 9/11 attacks, the dot-com bubble burst, the financial crisis, and the COVID-19 pandemic." She added, "It is difficult to say that we have entered a recession phase comparable to the pandemic or financial crisis, and it is important to note that the nature of the decline differs from that during trade disputes or tightening periods." She further stated, "Since the sharp drop of over 8% yesterday was irrational, there is a possibility of a short-term rebound driven by technical buying."