Hawkish Fed Raises Worries of Range-Bound Market Through First Half of Next Year [Weekend Money]

LS Securities: "Fed Rate Hike Squeezes Liquidity"
"Range-Bound Market Expected Until First Half of Next Year"

Kevin Wash, Chair of the U.S. Federal Reserve (Fed) Photo by Yonhap News

With the United States Federal Reserve (Fed) implementing its first benchmark interest rate hike in 3 years and 2 months, analysts have raised concerns over increasing risks of a stock market downturn due to tightening liquidity. Some also predict that, amid concerns over interest rates, the stock market will remain range-bound until the first half of next year.

On the 20th, Daun Jung, a researcher at LS Securities, stated in a report, "With the Fed raising interest rates, the environment has shifted to one where excess liquidity— a key driver of risk assets— is being squeezed," and added, "In the short term, the downside risk for both the Korean and global stock markets has heightened."

During the September meeting of the Federal Open Market Committee (FOMC), the Fed decided to raise rates by 0.25 percentage points (25 basis points), citing strong investment indicators, a need to address inflation, and the importance of protecting the Fed's independence. The median projection for the terminal rate in the dot plot suggested only one additional hike, but as many as eight committee members projected two more hikes by 2027, leaving the possibility open for a prolonged tightening cycle.

LS Securities pointed out that, because investments in artificial intelligence (AI) infrastructure rely heavily on leverage, any deterioration in liquidity inevitably burdens the stock market. The firm also explained that capital inflows into hyperscaler-related stocks, which led the market in the first half of the year, are now turning into a supply-and-demand drag at this time.

However, it was noted that the confirmation of the Fed’s resolve to control inflation during this FOMC meeting is a positive factor, as it could stabilize the previously spiking long-term bond yields and narrow the spread between long- and short-term rates. Upcoming events after the midterm elections and at the beginning of next year— such as the potential incorporation of stablecoins into regulated financial domains and the easing of financial regulations— are also expected to contribute to interest rate stability.

Jung advised, "From a relative perspective, developed markets—especially U.S. stocks—are more attractive for investment than emerging markets. Although caution outweighs optimism in the short term, I recommend a strategy of increasing allocations on price dips while maintaining a range-bound outlook for stock prices until interest rate stability becomes more evident (through the first half of 2027)."

This content was produced with the assistance of AI translation services.