The burden remains the same, but the pressure from the economic slowdown has progressed a bit more over the past month. Therefore, the market inevitably shows some imbalanced characteristics. Now, whether we are facing a wolf boy or if the actual wolf is coming is crucial here; the wolf represents economic penetration. In August, it started with the idea that it wasn't a wolf, and then it began to rise again. However, since we are now in a situation where valuations have increased, any signs of a wolf-like creature make everyone think it's a wolf, prompting them to flee. There are two things that can help alleviate this situation. One is that every Friday, we have a session with economist Dr. Kim Han-ji, where we summarize the economic and market conditions of the past week. Hello, Dr. Kim. Yes, hello. Before the start of September, based on existing seasonal statistics...

There were a lot of discussions about how weak September was going to be. But now that it's started, it really does seem quite weak. Perhaps people were a bit apprehensive due to the seasonal perception of September being weak, which likely influenced investor sentiment. Additionally, we are approaching significant events like the FMC meeting. In early August, we had already been discussing employment figures, and we experienced a shock from those, along with a prior shock from manufacturing indicators. It seems we are facing a somewhat similar situation now, which is adding to the tension. The July employment figures were released on August 2nd, and the market dropped sharply for two days following that. However, August has turned out to be somewhat of a similar situation with declines.

As we recover, isn’t it all coming to an end? Especially in the United States, everything has mostly recovered. If you look at the state stock markets, they have almost all bounced back, and there are even countries where the markets have risen further. However, as you mentioned, the situation has been similarly progressing since September. In early August, the employment indicators from July acted as a trigger, but this time it’s the ISM manufacturing index. Typically, this is not an indicator that receives much attention, especially since people tend to focus on the service sector in the United States. The manufacturing indicators have not been doing well, and it’s not a new story; they have been sluggish for about two years. Therefore, using the ISM manufacturing index as a trigger for the decline in stock prices indicates that there is a prevailing market sentiment of concern about a recession.

Among the two moving factors, the Federal Reserve's interest rate cuts have now been confirmed, so the market is somewhat acting in its own interest. While it is looking towards a 50 basis point cut, economic indicators need to be favorable, creating a contradictory situation. We are continuously hoping for a Goldilocks economy, but every time indicators that violate this expectation emerge, we see significant fluctuations in investor sentiment. 

Now, regarding the manufacturing PMI, it has consistently been poor. If we take a look at when this decline began and the current phase, it seems possible to conduct some analysis. Please assist with this. Throughout 2023, in fact, the situation was unfavorable for the entire year. The ISM PMI is reported with a baseline of 50, and if you look at the comprehensive ISM manufacturing PMI, it came out at 47.2 this time.

Since 2022, the situation has continued to be unfavorable, but there are signs that the momentum is slightly improving. Although it remains below 50, the figures indicate that the momentum seems to be reviving a bit. However, there are indications that it is again deteriorating from the second quarter. This raises some concerns that the economy may be cooling off more quickly than expected. The recent ISM PMI report did create some anxiety, but the release of the services PMI yesterday helped alleviate some of that unease. Currently, the services PMI is moving above 50, even though the momentum has slightly decreased. When looking at the overall manufacturing PMI and its components, such as new orders, production, employment, and inventory, the market has received the recent signals of deterioration negatively. In particular, the last component, which is production and new orders, indicates a significant downturn.

As orders are declining, inventory is now being seriously addressed. This could serve as a hint towards a potential economic recession. It's not necessarily definitive, but it seems that the market has reacted quite alarmingly to this. Now, regarding the proportions of the service and manufacturing sectors in the U.S., we know that the service sector is predominant, but the manufacturing sector is also being monitored quite sensitively. It would be helpful to elaborate on this significance. 

Manufacturing accounts for less than 15% of the U.S. GDP. However, manufacturing does provide a certain level of employment, so when the manufacturing sector deteriorates, it does have negative implications. While the GDP share is low, manufacturing in any country has a significant impact on overall employment metrics, so it cannot be disregarded. Meanwhile, the service sector...

Currently, employment is being maintained, so the momentum in manufacturing, as I mentioned, has been sluggish for about a year or two. It has seen some slight improvements, but then it declines again, resulting in a very stagnant state that has persisted for over two years. You could say it has consistently been in a bad condition. On the other hand, the service sector is a key factor supporting the U.S. economy right now. If the service sector also shows signs of weakness, the U.S. economy would be entering a complete recession. In this regard, while both sectors are important, the service sector can be considered slightly more crucial. However, in the current employment indicators for the service sector, some rather negative signs are emerging. Just yesterday, a private firm reported a very sharp increase in layoffs.

It has increased. Yes, so the ADP report came out slightly low at 99,000 jobs, but in March it was 200,000. However, the ADP was an indicator that people used to ignore because it lacked reliability. But now, the trend is correct. The monthly indicators, however, have a lot of errors. So, anyway, rather than that, the private sector report from Christmas and Challenger yesterday showed a significant increase in the layoff numbers, which has added some pressure to the market. It seems we need to pay a bit more attention to the layoff indicators. Now, if we only look at the employment indicators that have come out so far, opinions are divided on whether we are in a recession or not. That is something we will only know after some time, but it is true that signs of a slowdown are definitely accumulating, right?

Right now, what the Federal Reserve wants is for the economy to slow down. If it doesn't slow down, they will have to raise interest rates. If the economy is still too hot, they will need to increase rates by 50 basis points, not decrease them. The job market is cooling, which is what the Federal Reserve has been hoping for; now inflation needs to be controlled. These aspects are progressing steadily, and the direction is correct. 

If you look at the job report that came out the other day, employment is at 7.47 million. It rose to about 12 million during the pandemic, and the current figure from July 2021 is 7.47 million. As you mentioned, this July figure shows that employment is coming down. If you observe this trend, it indicates that we are at a level similar to the best times in 2018. So, when people look at the trend, is employment bad? It's compared to the previous peak.

The current level is about as good as it was during the expansion phase. Objectively, employment in the U.S. is not bad right now. It could worsen in the future, but the figures being reported are not negative. Especially in July, the impact of the strikes was significant, with 249,000 temporary layoffs, and nearly hundreds of thousands unable to go to work. July is a unique month in terms of these indicators. However, if you look at the trend line, it is not bad. The figures below represent employment, and while it may not be clearly visible, both layoffs and hiring are gradually declining together. This means that while companies are laying off employees, they are also hiring at a steady but reduced pace, aligning with each other. Therefore, as mentioned by Powell, the labor market's supply and demand is normalizing a bit.

It seems that the expression was made because of such indicators. However, according to what you said, the absolute numbers are not very bad and are rather moving in the direction of normalization. So why is the market so worried and concerned? The uncertainty regarding the upcoming recession is burdensome. It seems like a recession will come in three months, six months, or a year. It would be nice if it doesn’t come, especially if the Federal Reserve lowers interest rates significantly. However, the atmosphere that suggests it is likely to come is gradually becoming stronger. Because if a recession occurs, corporate performance will deteriorate, and if that happens, who will be able to maintain the current high valuations? There is anxiety about whether these high valuations can be sustained, and if they cannot, it ultimately leads to a drop in stock prices.

In order to justify this, the burden of the recent stock market decline ultimately stems from factors related to an economic recession. The market is currently viewing the economy with more concern. This situation reflects not just the absolute numbers but also the uncertainty and worries about future figures that might be recorded if this trend continues. Compared to this, stock prices are relatively high. The high stock prices are what have led to this situation. Currently, the S&P 500 is not at 20 times earnings but around 17 times. If it were at 17 times, this situation would not occur. The high prices are what create the anxiety. While these factors are interconnected, the fundamental issue is that valuations are quite elevated. The Buffett indicator is currently at 200%. This means that the total market capitalization of the U.S. compared to GDP is very high. Warren Buffett has suggested that this is somewhat of a gamble, indicating that it is quite risky.

It's an uneasy game, and that's a valid statement. Even if there is manipulation in the stock prices, is that really wrong? It's not unusual at all; we're currently enjoying a rather dangerous circus, which inevitably leads to an unstable investment sentiment. In the midst of this, an important indicator is set to be announced tomorrow. In fact, the market has been focused on tomorrow all week, maintaining a level of tension that wouldn't be an exaggeration to describe. As you mentioned, there was an influence from bears, which seems to have been temporary. Will this be confirmed in the figures from last month? We'll have to wait and see, but the consensus on Wall Street is for 165,000 jobs, which is a normalization from last month's 114,000. If it exceeds 150,000, it indicates that we are not deviating from the trend. If you look at the first quarter, it was 260,000.

It was 70,000, which is quite high for new jobs compared to the previous month. However, now in the second quarter, it's about 167,000. In the recent three months, it has also been around 170,000. So, while it may be difficult to reach the first-quarter figures based on the recent three-month data, the trend is currently declining, and the market would like to confirm that this decline is gradual. Therefore, if the number exceeds 160,000, the market will breathe a sigh of relief. On the other hand, if it shows a figure like 100,000, similar to the ADP report, of course, expectations for a 50 basis point cut will rise, but the market will inevitably drop due to the concern that the recession may come sooner than we thought. This anxiety will pull the market down. So, in the short term, the key focus is on the employment figures that will be announced tomorrow, and another important aspect is the dot plot from the FOMC, where members will discuss future rate cuts.

We are looking at the trajectory to some extent, so the question is, where can the final benchmark interest rate go down to? Is it 3.0 or 2.5? We are waiting for concrete data on this, which may come out on September 18th from the FOMC. First, if we look at the trend of job numbers, the previous data showed how much they increased compared to the previous month. This is not just about month-to-month changes; we are looking at the job numbers themselves. The job numbers are displayed in thousands, and they have been increasing quite sharply. They have been rising every month. During the COVID period, there was a clear decline in job numbers during the recession. Job numbers dropped significantly during that time due to rapid layoffs. However, currently, the trend is not pointing downwards.

So, even if the number of new jobs we see each month comes out a bit lower, the slope is becoming somewhat horizontal or flat. This is going in reverse. For it to go in reverse, we need to see less than 100,000 jobs each month. Therefore, I argue that the possibility of a recession is quite high, especially since it's not just about employment itself. If employment collapses, Americans will have no money to spend, especially when their savings are already depleted. With prices rising and savings gone, and layoffs increasing, who will drive consumption? They can't consume because they have no money in their wallets. That's why consumer spending is important. This consumer spending is compared to the same month last year, and it’s based on a $10 billion standard, not a percentage. So, consumer spending is continuously...

It is decreasing. The increase is now slowing down a bit. Monthly spending is starting to plateau. You can interpret it this way. The degree of this plateauing is gradual; it is not steep. Similarly, employment is not sharply declining, and personal consumption expenditures compared to the same month last year are also showing a gradual change. So, while it is being maintained, if you look at the absolute scale, it is still higher than during the good economic times of 2018. Therefore, the objective assessment is that the U.S. economy is not bad. The GDP estimate for the second quarter is at 3%. So, it is 3% now, and the next quarter might be 0%, and then in the fourth quarter, it might be negative. There is almost no possibility of such sharp fluctuations. However, I believe the market's concerns are excessive. The economy is slowing down, and eventually, it will recover.

It's true that whether short or long, a recession is coming. However, it's not something that will happen immediately. People are very anxious and unstable, often unable to sleep, as they focus on very short-term indicators like new unemployment claims each week. This anxious state is heightened by the fact that stock prices are high, leading to restless nights. There are many factors at play here. Always, when we return to the starting point, stock prices have risen significantly, which is why the market is reacting sensitively to every small indicator, especially in the context of the U.S.

Now, we are approaching the FOMC meeting. A rate cut is almost certain, and there will likely be ongoing discussions about 25 basis points versus 50 basis points. However, the expectations surrounding a 50 basis point cut may lead to different reactions in the stock and bond markets. The expectation of 25 basis points may not necessarily be positive for the stock market.

If the reason is stagnation, then I think we should touch on this aspect as well. The comments from the Federal Reserve will be quite important. On September 18th, they will likely send comments indicating that the economy is slowing down as we expected, the labor market is finding some balance between supply and demand, and our inflation target is coming into view. Therefore, I think they will mention that the committee has decided on a 25 basis point increase. I believe the dot plot will not differ much from June. They will likely suggest a final benchmark interest rate of around 3%. Similarly, I think they will propose a rate cut pace of about two times this year and four times next year, or perhaps five times. So, the final terminal rate will be around 3.75%. Of course, the dot plot and the suggested final benchmark rate will be 3.0%.

What the market perceives now is that the comments and the statement from the Federal Reserve suggest that it might be acceptable to go below 3.4. So, it seems that by the end of next year, we could be below 4.0, and that would likely not lead to a negative reaction in the stock market. This is because it indicates a mild economic recession. The indicators coming out from the Fed are not necessarily bad; rather, they suggest that a recession is approaching quite rapidly. However, we are not in a hurry to rush into any conclusions. On the contrary, there is a possibility that the Fed might not provide a psychological boost regarding the recession. Therefore, I believe the chances of that happening are low. As a result, I expect the market to interpret the stock outcomes from the Fed's meeting positively, while in the bond market, short-term interest rates are likely to drop significantly.

Yes, so in June, even with the FMC, there was a bit of uncertainty, right? Yes, regarding the interest rate in September. But this time, with the confirmation and the action being taken, the dot plot is showing that the bond market is reflecting this very definitively. In particular, short-term interest rates have fallen significantly, and historically, when the Federal Reserve lowers rates one or two or three times, long-term interest rates also tend to drop, and the dollar shows weakness. So, with the dollar weakening, the 10-year bond yield is rapidly approaching around 3.5%, indicating a strong trend in the bond market. Regarding the FMC, if they raise by 25 basis points, there will be comments suggesting that the economy is normalizing gradually, which could lead to some cheers as it finds a degree of stability. Now, why do we keep referring to early August in such a grand manner? You've also used the expression hospitality, right?

I don't know why, but it seems that the reasons for the situations and discussions from then and now haven't changed. First, there are ongoing concerns about stagnation and a slowdown. Second, technology stocks centered around AI are still considered too expensive. There are doubts about whether this is the end or if there will be a significant downturn. Additionally, it seems that there is a lot of uncertainty regarding the yen as well. How do you see the possibilities? Yes, that's right. If the stock prices in August hadn't risen, and if they hadn't been able to recover, the market capitalization ratio of the M7 stock market and the PR burden of the S&P IT sector would have been resolved. The market fell, but it has recovered again. It has returned to the levels before the sharp drop in early August, which means the same circumstances exist. If we focus solely on the market conditions, it is at the end of July.

At the beginning of August, nothing has changed. If you were to wake up and ask what happened, everything has returned to the same state, so the valuation burden remains unchanged. However, the concern about economic slowdown has progressed a bit over the past month. If a recession were to come, it has likely moved a step closer since the end of the year, right? Over the course of a month, the market inevitably shows some imbalances. Now, whether this is the wolf boy or if a real wolf is coming, the wolf here symbolizes economic penetration. In August, it seemed that the wolf was not coming, and as we started to say that the wolf is not coming, the market began to rise again. But now, with valuations being high, as soon as we see any creature resembling a wolf, everyone thinks it’s a wolf and tries to run away.

Currently, there are two ways to mitigate the situation. Unfortunately, one way is for the stock prices to adjust, which means that in September, they could not avoid seasonal fluctuations, leading to a reduction in the burden of valuation. The second way is the hope surrounding the economic indicators related to the Goldilocks scenario, which could potentially improve corporate performance. While this does not necessarily mean an immediate boost in earnings, many companies are providing slightly positive comments or good guidance, suggesting that growth in the AI sector might continue. We are currently waiting for news on this front.

In addition, while the U.S. market managed to recover from the sharp decline at the beginning of August and ended slightly positive, we have not been able to do the same. As a result, we are experiencing greater shocks and are struggling more, which is a disappointing aspect of the situation.

We are currently unable to provide assistance, and it seems that the overall trend in global stock markets is somewhat unstable. Additionally, the domestic market is experiencing increasing supply and demand vulnerabilities. We will take a closer look at these aspects. So, at this point, is waiting the best option? It seems that volatility will continue to be high. Although the VIX index dropped slightly yesterday, it remains elevated, which signals that market volatility may persist in the future. We can expect significant intraday, weekly, and even monthly fluctuations. While high volatility might be welcomed news for traders, it can be quite exhausting for general investors. In this challenging market, there is a growing atmosphere of economic cooling and concerns about valuation burdens.

If the atmosphere is somewhat more negatively impacting the stock prices, it seems advisable to utilize this volatility to adjust the portfolio by shifting towards slightly lower-risk and more conservative stocks. Understood, I will stop here. We have had Dr. Kim Han-jin, an economist, with us. Thank you for your insights today, Doctor.

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