[Edaily Reporter Kim Kyung-eun ] Analysts have suggested that inflationary pressures must ease for the KOSPI to exhibit a “W-shaped” recovery. Historically, after the stock market has plummeted by more than 25%, it has mostly followed a W-shaped pattern, forming two lows. The outlook is that the point at which inflation concerns subside will be the key factor in determining the market bottom this time as well.

Lee Eun-taek, an analyst at KB Securities, stated in a report on the 22nd, “The key factor to watch for a W-shaped rebound is the easing of inflation,” adding, “We need economic indicators or external events that can reduce inflationary pressures.”

According to KB Securities, in cases where the KOSPI has plummeted by more than 25% in the past, a V-shaped rebound—in which the market immediately turns upward—has rarely occurred, with the exception of 2020. Most often, the market either exhibited a W-shaped rebound, forming two lows, or continued into a further downturn.

There were also quite a few instances where the second low was lower than the first. This means it is difficult to conclude that the stock market has passed its final low just because a recent rebound has occurred.

The factors driving the stock market decline are also shifting. While concerns over memory semiconductor earnings and rising interest rates were the primary causes during the initial phase of the KOSPI’s sharp decline, which began on the 7th, subsequent analysis suggests that inflation concerns stemming from the rise in the U.S. Consumer Price Index (CPI) and import prices have since driven the downturn.

The analyst stated, “Inflation concerns have increased the likelihood of interest rate hikes by the U.S. Federal Reserve (Fed), and the market has grown increasingly worried that a sustained tightening cycle will ultimately derail the economy.” He added, “As a result, short-term interest rates have risen, while long-term rates have actually fallen. In this situation, a decline in long-term government bond yields is a more alarming signal than a rise.”

The analyst assessed that for the stock market to rebound, at least one of the two factors—concerns over the memory semiconductor sector or inflationary pressures—must ease. In particular, the analyst advised focusing on indicators and external factors that could reduce inflationary pressures rather than on whether semiconductor earnings will improve.

The analyst predicted, “It could be positive news if the price index within the U.S. Institute for Supply Management (ISM) Manufacturing Purchasing Managers’ Index (PMI) declines or if wage growth slows in employment indicators,” adding, “News that could lead to a drop in international oil prices—such as progress in negotiations regarding Iran—could also serve as a catalyst for a rebound.”

In fact, the explanation is that expectations of expanded crude oil supply were behind the KOSPI’s intraday drop of up to 3.2% on the 19th, followed by a 1.76% gain at the close. At the time, investor sentiment improved as expectations grew that crude oil supply could increase following U.S. President Donald Trump’s suspension of sanctions and tariffs against Russia.

However, the analyst predicted that inflationary pressures are unlikely to subside in the short term. The analysis suggests that over the next one to two quarters, indicators signaling both a slowdown and a resurgence in inflation are likely to appear in alternating patterns at one- to two-month intervals.

The analyst added, “If evidence continues to mount that inflation is trend-based, the market’s difficulties will be hard to resolve easily,” noting, “While optimistic and pessimistic indicators regarding prices will alternate in the short to medium term, we do not view inflation very optimistically over a longer-term horizon of about one year.”