October Stock Market: Expect Rise of Secondary Batteries

Until last month, US employment indicators showed a continuous decline. However, this decline includes some temporary noise, such as a decrease in teacher-related employment due to summer vacation, making it premature to conclude that the job market is rapidly deteriorating.

"You see the trend is down. Of course, this employment indicator last month had summer vacation, and there's some noise related to teachers in it, so it's still premature to say it's necessarily negative."

US retail sales have turned negative, and Americans' savings rates have hit an all-time low, indicating a significant weakening of consumption capacity. Due to rising oil prices and economic uncertainty, people are actually reducing spending, and real wages are also negative, suggesting an overall contraction in consumer sentiment.

"Retail sales actually went negative. People started not spending money because oil prices are high and the economy is a bit difficult. And this next one is the savings rate. Americans' savings are at an all-time low."

The Federal Reserve's (Fed) intention to raise interest rates implies a precondition of a healthy economy. Various economic indicators, including employment data, currently suggest an economic slowdown. If this precondition collapses, there could be a change in the Fed's interest rate decision. However, if oil price increases are prolonged, inflationary pressures could prevent completely ruling out an interest rate hike, and a September rate hike is still being mentioned.

"The meaning behind the Fed raising interest rates is that there's a precondition that the economy is fine. But if that precondition of a good economy, starting with the employment indicators out tonight, collapses, then they might have a different idea."

Currently, the core driving force of the US economy is AI-related investment. AI investment plays such a crucial role that without it, the US economy would struggle to maintain its current resilience. However, concerns are also being raised that discussing interest rate hikes in this situation, coupled with the market's negative perception of AI investment, could lead to a contradictory situation.

"What is the core driving force of the US economy right now? It's investment, isn't it? So, AI investment is the driving force sustaining the US economy."

In the October market, it will be crucial not only whether interest rates are raised, but also to understand how the Federal Reserve (Fed) views future AI investment. Based on this analysis, it is currently judged that the market's direction, whether up or down, is likely to become quite clear.

"It's very important to see not just whether interest rates go up or down, but also to understand the Fed's perspective on future AI investment through their actions. So, I currently think there's a good chance the market's direction, up or down, will become quite clear in October."

The market trend from 1995, after an interest rate freeze, to 1999, which saw only one rate hike, is analyzed as being most similar to the current situation. At that time, there was a temporary market shock immediately after the rate hike, but when the rate freeze continued and there were no consecutive hikes, the index actually rose. This suggests that if a single interest rate hike is not a continuous trend, the market can overcome the shock and rise again.

"The picture from '95 to '99 seems the most similar. What happens after one hike? There's a shock. But if it's frozen afterwards, meaning the condition is what? If it's not consecutive, if it's just one hike without continuity, what happens? The index went up above that."

Even if we assume there might be a single interest rate hike, if that hike is not continuous, the index is likely to return to its original position. Non-continuous inflation is more difficult to predict because supply-side factors are strong. Furthermore, the current interest rate level already has the potential to cause cracks in the US economy, so any additional rate hikes should be even more cautious.

"Even if we assume a potential single interest rate hike, if there's no continuity, the index is likely to return to its original position. That seems to be the most rational perspective."

During the 1970s oil shock, there were many interest rate cuts interspersed. Despite rising oil prices, with repeated economic recessions, interest rates only rose and fell repeatedly and did not lead to a trending form of interest rate increases. This suggests that even in past crisis situations, interest rates did not unilaterally rise.

"There were many significant rate cuts interspersed. Because ultimately, there were multiple economic recessions. Despite rising oil prices, rates just went up and down repeatedly, but they didn't trend upwards for interest rate hikes, as you can see."

The most critical variables for the Federal Reserve's (Fed) interest rate decision are the upcoming employment figures and the Consumer Price Index. If there's a significant result showing a sharp slowdown in employment and an acceleration in inflation again, the possibility of an interest rate hike should be considered. However, an interest rate hike in an already slowing economy could accelerate the slowdown.

Any market adjustment due to such an interest rate hike should be viewed as a good opportunity to increase portfolio weight. At this point, rather than being overly cautious, it is important to carefully monitor economic indicators as they are released and formulate a rational response strategy.

"If the employment figures coming out today and the Consumer Price Index next week show meaningfully good levels – meaning, for us, if employment really drops and inflation, contrary to what Christopher Waller said, truly accelerates again – then we'd have to consider a hike, but..."

Major brokerage firms like Citi are lowering the target prices for semiconductor companies, but this is interpreted as the market preparing for a difficult situation in advance. It means investors are already recognizing and responding to risks, and these downgrade reports are largely already reflected in market prices. The impact of exchange rate fluctuations on profit reductions is also being reflected by the market.

Despite these target price downgrades, it's important that the long-term demand for AI semiconductors itself has not been damaged. The current adjustment is due to short-term external factors, and the fundamental expectation for AI innovation remains valid.

"Because we're getting hit early. Um. Oh, if bad news comes out later when things are actually bad, those downgrade reports would be really painful, but if they come out early like this, we're prepared, aren't we? We're reflecting all of that."

Recently, as semiconductor stocks have temporarily faltered, there's been a phenomenon of investment funds rotating into other sectors. In particular, investor interest in the secondary battery sector has recently increased again, signaling active supply and demand rotation within the market.

"Recently, with semiconductors slowing down a bit, there are signs of rotation within other sectors, and the sector that has caught my eye recently is secondary batteries."

One of the main reasons for delays in data center construction recently is severe power shortages. Since data centers are difficult to return to their previous performance after even a single power outage, it is essential to create an environment where power can be supplied consistently without interruption under any circumstances.

To achieve this, not only is large-scale power expansion needed, but the value of ESS (Energy Storage Systems) for stable power supply is also greatly emphasized. As data centers increase, ESS demand is expected to surge, creating new opportunities for secondary battery-related companies.

"Once a data center has a power outage and is restarted, it doesn't return to its previous performance. The reason is still unknown, so in any case, we need to expand power considerably, but also create an environment where power can be supplied consistently without interruption. For that, the value of ESS is being greatly emphasized, as you can see."

The current rise of the secondary battery sector is not just a simple investment idea, but is based on actual performance improvements by companies. What's important is that concrete figures are emerging from related companies, and these figures are driving the increase in their valuations. Therefore, this can be regarded as a very meaningful market change.

"It's not just a simple idea, but because performance is improving. What's important is that numbers are coming out, and those numbers are driving up the valuations of these related companies, so it should be seen as meaningful."

Recently, despite several companies announcing large-scale order contracts, their stock prices have fallen. This demonstrates the very high level of caution among current market investors. Stock prices dropping despite positive news indicates a strong sentiment among investors to use such opportunities to realize profits and exit the market.

Furthermore, a lack of market liquidity and investor confidence exacerbate this phenomenon. The prevailing mood is one of focusing on short-term risk management rather than positive news.

"The recent decline in some companies' stock prices despite large order announcements really proves that market investors are still very cautious. This means that when such orders come out, there's a very strong sentiment among investors to use them to sell and leave."

I believe that the difficult caution that persisted throughout September could actually be a catalyst for a market rebound in October. The market correction due to excessive caution is judged to have already progressed sufficiently, and this has the potential to become an opportunity to secure upward momentum in October.

"In a way, I think this difficult caution in September could become a catalyst for a rise in October."

The supply and demand 'black hole' issue that weighed on the market in September is expected to resolve from early October. Consequently, the market is likely to move in the opposite direction from September, which could bring about positive changes in the investment environment.

"From early October, it's now the opposite concept."

Expert opinions on the market outlook are largely divided into two perspectives. One side views the current movement as a temporary rebound followed by a return to a bearish market, while the other interprets it as a temporary adjustment within a larger upward trend.

As market views diverge, investors must devise different strategies based on their individual perspectives. Both sides present valid arguments, requiring careful judgment on how to approach the market.

"The opinions of those forecasting the market are very divided."

Investors who still view the market as bearish should adopt a strategy of reducing stock holdings and exiting the market whenever it rebounds. Conversely, investors who view the market as an adjustment phase within an upward trend should utilize any further corrections as an opportunity to increase their holdings.

"Those who still say they see a bear market should reduce their holdings as it rebounds."