[Market Insight] "Fed's Rate Cut Intentions May Accompany Stock Price Decline... Risk Management Needed"

Interview with Kang Hyun-ki, Head of Equity Strategy at DB Financial Investment
Fed Cautious on Employment: "Rate Cuts Came Too Late"
Decline in Leading Stocks' Revenue Growth... Caution Needed Across the Market

Kang Hyun-ki, Head of Equity Strategy at the Asset Strategy Team of DB Financial Investment, is being interviewed by Asia Economy at the headquarters in Yeouido, Seoul. Photo by Huh Young-han younghan@

"Stock prices may decline alongside interest rate cuts. It is necessary to take a step back from the market."

Kang Hyun-ki, head of the equity strategy team at DB Financial Investment, said that risk management is needed to prepare for the potential stock price decline during the period of interest rate cuts.

Kang is a figure who advised the Yeouido securities community to prepare for a stock price decline even before the recent major market volatility. He emphasized, "The market is recognizing the decline in economic fundamentals that had been overlooked, triggered by the interest rate cuts. We need to be cautious not only about the leading stocks in the artificial intelligence (AI) industry but also the overall stock market."

Understanding the Fed's Intentions... "Interest Rate Cuts Came Too Late"

Kang said that the Federal Reserve's (Fed) 'big cut' (a 0.5 percentage point reduction in the benchmark interest rate) demonstrated through its actions that the interest rate cuts were delayed and that it is time to be cautious about the weakening U.S. labor market. He mentioned, "The Fed is an institution that finds it difficult to openly mention even if the actual U.S. economic situation is poor or expected to worsen. We should interpret their actions rather than their statements," highlighting the Fed's nature.

He continued, "When the U.S. Department of Labor revised the August nonfarm payrolls, it revealed that employment was actually weak. Until now, the Fed claimed that high inflation was due to a hot labor market and that high interest rate policies needed to continue to cool it down, but it turned out that employment was not as strong as they thought," adding, "Ultimately, the big cut is an action to correct the previous interest rate policy mistakes. This interest rate cut came too late."

Kang speculated that the Fed is likely watching the relative positions of the job openings rate and the unemployment rate to be cautious about weakening employment. He said, "Usually, a decline in the job openings rate leads to a rise in the unemployment rate. Fed officials have mentioned that when the job openings rate reaches 4.5%, the unemployment rate could surge," noting, "Currently, the job openings rate has fallen to 4.6%. It is near the critical point where the unemployment rate could rise further."

Kang explained that the weakening of employment as well as the overall economic fundamentals will be confirmed over a considerable period through indicators released at the end and beginning of each month. He said, "The economy has a rhythm. After changes in the leading economic index, the coincident and lagging indices respond. Currently, the Conference Board's U.S. Leading Economic Index has significantly declined. Subsequently, the coincident and lagging indices will fall with a time lag," interpreting, "From now on, upcoming economic indicators are likely to be unfavorable for the stock market. This is also why market volatility has increased recently at the end and beginning of months."

Cutting Interest Rates Won't Immediately Revive the Economy... Market Valuations Are Also Expensive

Kang Hyun-ki, Head of Equity Strategy at the Asset Strategy Team of DB Financial Investment, is being interviewed by Asia Economy at the headquarters in Yeouido, Seoul. Photo by Huh Young-han younghan@

Some expect that this interest rate cut will timely revive the slowing economy. In response, Kang said, "It is necessary to examine the borrowing behavior of economic agents. When the economic situation worsens, a few interest rate cuts alone do not increase borrowing," pointing out, "We need to consider that borrowing may be postponed in anticipation of further rate cuts, so interest rate cuts and economic downturns can proceed simultaneously."

Kang also said that the current U.S. market valuation is somewhat expensive compared to the past. He explained, "The cyclically adjusted price-to-earnings ratio (CAPE), which is similar to the price-to-earnings ratio (PER) but uses the past 10-year average earnings per share (EPS) to reflect time value, is currently the third highest in the 154-year history of the U.S. market from 1871 to 2024," diagnosing, "This is more expensive than just before the Great Depression. The current U.S. market is by no means free from the word 'bubble.'"

Kang added, "For the logic of 'this time is different' to hold in the current stock market, policymakers must have a secret weapon to prevent the ongoing U.S. economic slowdown, or AI must build an independent boom despite the overall weakening demand, or there must be stock market materials or psychological expectations that can greatly stimulate public investment again," and answered, "So far, the probability of that seems low." He added, "Of course, I could be wrong. I will always watch flexibly."

Leading Stocks Declining, Risk Management Needed... "Exercise Patience"

Kang said attention should be paid to the weakening movement of AI-related stocks, which have led the stock market this year. He said, "In the final stage of past stock market bubbles, leading stocks tend to weaken relatively while peripheral stocks strengthen, and a similar pattern is seen now. Especially, the fact that Nvidia's revenue growth rate is declining is problematic," judging, "The market has already experienced overheating and harbors the possibility of a decline. Now is the time to manage risks."

He continued, "I have no doubt that AI technology will make our lives richer. AI will change the future of humanity. However, even if products and services based on innovative technologies that can change the future are released, if the real economy is sluggish, such outputs are difficult to absorb," explaining, "For example, the internet changed the world not only in the early 2000s but also today, 25 years later. However, when the economy was sluggish in the early 2000s, internet-related stocks declined. The real economy was weak, so demand to consume these was reduced. As a result, people doubted the technology (which ultimately changed the world but had underwhelming results at the time), and related stocks fell."

Kang said the timing when interest rate cuts conclude will be important. He said, "When central banks cut interest rates, the market may decline alongside during the process, but whether sufficient decline has occurred over time can be hinted at by the interest rate level," forecasting, "When the interest rate cuts finish and rates form a bottom, the market will begin to rebound."

He added, "There is no need to invest in stocks at every moment. Especially individual investors have the great advantage of being able to choose their investment timing themselves. I hope you make full use of this," advising, "In times of market turmoil like now, it is necessary to take a step back. If you exercise patience during times like these, opportunities will come to buy good stocks at appropriate prices in the future."