[PB Notebook] Appropriate Investment Philosophy Amid US Recession Risks

Yushin Ik, Chief Economist at KB Kookmin Bank

"Concerns about a U.S. economic recession, the possibility of Japan raising its benchmark interest rate and the reduction of the Yen Carry Trade, and valuation pressures on AI companies centered around Nvidia." These are the three recent factors intensifying volatility in the global financial markets, especially in the U.S. These factors periodically amplify market anxiety and concerns, acting as obstacles to a favorable financial market trend.

Among these, the foremost is undoubtedly the concern over a U.S. economic recession. Notably, the U.S. has shown a strong performance centered on the service sector over the past three to four years. Therefore, this recession concern is identified as a very significant risk factor that could threaten the global financial markets.

Looking at key indicators, in July, the number of job postings in the U.S. was 7.67 million, marking the lowest level since January 2021. The job openings rate (calculated by dividing the number of job openings by the sum of total employed persons and job openings) was only 4.6%. Considering that the job openings rate was 7.4% in March 2022, it can be interpreted that the U.S. labor market is cooling down after two years of a boom.

However, it is necessary to distinguish whether these difficulties in employment indicators are real or an illusion. In other words, it is important to determine whether the U.S. labor market, which represents the economy, has actually shifted into a recession or is simply normalizing after overheating. Currently, U.S. employment-related indicators remain at normal levels. For example, the 4.6% job openings rate recorded in July is similar to the level just before the COVID-19 pandemic.

Rather, it would be appropriate to interpret that investors, having experienced excessively hot employment indicators over the past two years, are expressing anxiety despite the current indicators being at normal levels. This is similar to feeling excessively cold after returning from a warm Southeast Asian trip in winter.

At this point, the question to consider is, "If the currently normal employment situation worsens, what actions will the U.S. Federal Reserve (Fed) and the federal government take?" Many Fed officials have recently expressed views that they should prepare for employment deterioration without waiting for the 2% inflation target.

Of course, with the U.S. presidential election scheduled for November, it is currently difficult to prepare specific expansionary fiscal policies. However, after the election, regardless of whether Vice President Kamala Harris or former President Donald Trump becomes the next president, it is highly likely that expansionary fiscal policies focused on infrastructure investment will be implemented.

Therefore, from an investment perspective, what should be noted is not the interpretation of a recession but the forthcoming "policy shift." Employment indicators are normalizing from overheated levels, and the U.S. presidential election will conclude in a few months, increasing the likelihood of policy coordination between the Fed and the federal government. Thus, rather than negatively interpreting the current situation, it is rational to focus on industries that will experience a boom considering the U.S. economy's recovery in 2025 after the election.

If concerns about a recession subside after the U.S. presidential election, the negative impacts on the financial markets from worries about the reduction of Japan's Yen Carry Trade and excessive valuation burdens on AI companies are expected to be limited. Therefore, now could be an appropriate period to prepare in a way that suits one's investment style within a financial market environment that always grows amid worries and concerns.