When is the bottom?" Judging from the possibility of a turnaround in the stock market,

 The stock market is in the fog due to anxiety that a recession will come as interest rates soar due to high inflation. Except for those who entered the market at the beginning of the 2020 rebound, entry into the loss section is imminent. Securities firms, which had been shouting "We are close to the bottom" just a month ago and "We can rebound in the second half," are now changing their words, saying the stock market could fall further. We looked at the background of the fluctuating diagnosis of securities firms and the possibility of a market reversal in the future.

Collapsed Maginot Line' KOSPI 2,500

The KOSPI, which closed at the end of last year with 3,000 collapsing, fell below the 2,700-point level in March this year, but the 2,500-point level did not collapse. The KOSPI 2500 is one times the PBR. If released easily, the value of net assets excluding debt among assets of KOSPI-listed companies will be the same as the market capitalization. If it is less than 1 times the PBR, it means that the future net worth of companies will be less than now, which means that there will be a deficit.

The most recent time when one PBR was broken was in the fourth quarter of 2018. As the U.S. raised its key interest rate, it began to reverse short- and long-term interest rates, in other words, showing signs of sluggish economy. It fell to 0.8 times in August 2019 and fell to 0.59 times in March 2020, when the COVID-19 shock hit. It will recover one-fold at the end of 2020 and increase to 1.3 times last year. In other words, the market's judgment on the value of the stock market has changed from "more than 40% poor" to "more than 30% expansion."

The collapse of the KOSPI 2500 also threatens another support line, which is 10 times the PER ratio. This means that the market capitalization is 10 times the net profit of listed companies. A fall in PER values means that companies' profits do not increase well. It also means that the market does not pay generous prices to companies, which is deeply related to the amount of money released on the market and interest rates. When interest rates fall, PER goes up. The KOSPI was a stronger support line than the PER 10 times the PBR.

#Up 2900, down 2000

For 20 years, the average KOSPI has 1.18 times the PBR and 14.82 times the PER. It is time for the KOSPI to move between 2900 and 3100 last fall. This is also why securities firms recently expected the top of their second half forecast to be around 2,900 to 3,000. The problem is the bottom. If it is 0.8 times PBR in 2019, it will be pushed back to the 2,000-point level. In other words, the KOSPI may rise by 25% or fall by 20%. What matters is interest rate levels and corporate performance.

The expected average of securities firms' operating profit for KOSPI companies in the second quarter compared to the same period last year is about 19.5%. This means that experts believe that Korean companies' profits will increase by 20% in the second quarter of this year from a year ago. Our stock market has many export companies. If the exchange rate increases, the won-denominated amount will increase even if it is the same dollar sales. The won-dollar exchange rate in the second quarter of last year was around 1,120. The exchange rate has recently risen to 1,290 won, and the average in the second quarter of this year is more than 1,260 won.

Prices and interest rates should also be considered. In the second quarter, international oil prices soared over $100 a barrel to around $120 a barrel. The interest rate that companies pay when borrowing money from the market was less than 2% in the first half of last year alone, but it recently rose to 4% in the first quarter of this year, exceeding 3% in the first quarter of this year. Prices and interest rates are reflected in the real economy over time. In other words, it could be more difficult as the third quarter progresses.

#Biden's diplomacy needs to move the Fed

If inflation is caused by high demand, it may be effective to calm the economy by raising interest rates. However, if inflation is caused by twisted supply chains, rising interest rates can dampen private economic activities, leading to a recession. For the U.S., which supports consumption with overseas imports, a strong dollar is needed to curb prices. Stock markets plunged on news that the U.S. is planning to raise its key interest rate aggressively, raising concerns over stagflation (price inflation is occurring at the same time amid the economic recession). In the end, the U.S. Federal Reserve (Fed) is the main body that will provide clues to the market's rebound.

The Biden administration should revive the stock market ahead of the November midterm elections. In the United States, the household economy and the stock market are deeply linked. It is necessary to control prices, but it is difficult to damage the economy too much. The Fed's hawkish moves may also be intended to end the price crackdown phase "short and thick." As soon as the U.S. signals that it will control the speed and slope of interest rate hikes, the market is likely to stabilize quickly.

The Fed's change in attitude should be based on diplomatic efforts by the Biden administration. The key is how to fill the vacuum in Russia and Ukraine in the raw material and food markets and how to lead to increased production in oil-producing countries in the Middle East. The Organization of Petroleum Exporting Countries (OPEC) sees the current supply shortage as a golden opportunity to recover its once-difficult finances.