Stock Market Falls on AI Speed Moderation and Rate Anxiety

The KOSPI fell 3.3% to close at 6,681, deepening investors' concerns. Analysts say the sudden emergence of the AI development speed moderation debate and heightened possibility of a rate hike worked in combination to weigh on the market.

There is a view that whether this decline is the start of a full-fledged negative trend or temporary noise can only be judged by watching the U.S. market's reaction further. At this point, it is difficult to conclude whether AI-related issues will act as fundamental noise for the market.

Even just before the market opened, oil prices surged first, breaking through $100, adding further burden to the market. On top of this, as the possibility of a rate hike expanded, investment sentiment toward growth stocks rapidly cooled. It is analyzed that geopolitical risks and rising oil prices acted as a compound burden on the market, deepening the overall weakness.

The movement to monitor AI's thought processes and strengthen security to secure both efficiency and control has emerged as a key issue. This is interpreted as an effort to preemptively manage the potential risks that AI technology development could pose to humanity.

This is because, to prevent AI models from falling into an uncontrollable state, their thought processes must be continuously monitored and security and control processes introduced. Such changes affect hardware requirements, and despite short-term efficiency issues, they could drive semiconductor demand in the long term.

As a consensus forms that rate hikes are unavoidable considering employment data and the Producer Price Index (PPI), the focus is shifting from simply whether rates are frozen to the number of rate hikes, the Federal Open Market Committee (FOMC) dot plot, and future economic growth.

The direction of stock prices is expected to be determined by how the market interprets the nuances before and after the FOMC announcement. With neither a rate hike nor a freeze guaranteeing immediate market stability, investors are increasingly taking a wait-and-see stance.

This appears to reproduce the same fear sentiment as last year's case when Hynix plunged during CEO Sam Altman's remarks. As caution grows over the possibility of retail investors' panic selling, the need to closely examine supply-demand conditions is being raised.

While trading is mainly led by foreigners and institutions, retail investors tend to show short-term excitable supply-demand patterns. It is analyzed that dopamine-driven trading, rather than index plays or long-term trading, is highly likely to fail.

Investors with high holdings of Samsung Electronics and Hynix were advised to take a longer investment horizon in consideration of dividends. There is a possibility that foreign supply-demand could improve after companies complete their share buybacks. Downward revisions to earnings estimates are already being reflected in the market, and the period after third-quarter earnings announcements is likely to be an important inflection point.

The opinion was presented that if one holds a lot of cash, it may be worth considering buying in the current range. According to past data, the three to four trading days before the Chuseok holiday were the worst period for the market. Investors without cash should maintain their current portfolio rather than forcibly adjusting weights, and portfolios centered on small- and mid-cap stocks need to be reduced and shifted toward earnings-driven stocks.

These sectors are evaluated as suitable for investors seeking stable investment because their stock price volatility is relatively low. An analysis suggests that rather than nuclear power-related stocks that have already risen a lot, attention should be paid to sectors that have been neglected by the market but show clear earnings improvement.

Although there are still remaining events such as the midterm elections and war risks, the possibility is raised that the market's uncertainty burden could ease after Micron's earnings announcement. This instills expectations that the market may be bottoming out by pre-reflecting major headwinds.

With the emergence of the AI speed moderation debate, the possibility of slowing demand for the semiconductor sector has increased. The outlook for the semiconductor sector, which previously had a high 60% probability of rising, has reversed to a 60% probability of falling. The weakening of support after breaking below the 120-day moving average is also cited as a factor raising the need to adjust semiconductor weighting.

If rates are frozen at this FOMC, the market is likely to harbor doubts about the Fed's willingness to respond to inflation. With uncertainty over whether a rate hike would shock the market, a freeze could also make it difficult to predict the number and timing of future rate hikes, increasing uncertainty.

The AI speed moderation debate that emerged over the weekend and inflation anxiety caused by rising oil prices made the market withdraw its buying stance. This could amplify concerns about the rate hike cycle and lead to a contraction in investment sentiment.

As recent damage to market investment sentiment has been confirmed, the need to adjust semiconductor weighting was emphasized. This is based on the judgment that the semiconductor sector may find it difficult to play a leading role in the market for the time being.

It is pointed out that granting robot-related growth valuations when core business performance does not support it is out of order. As exchange rate volatility has a greater impact on the automobile industry's performance, preparations for this are needed.

The argument is that a strategy of diversifying the portfolio to target fast sector rotation while maintaining a cash weight of around 20% is needed. This is interpreted as a preemptive response to prepare for market uncertainty and discover new leading sectors.

This suggests that market participants believe the Federal Reserve (Fed) has entered a rate hike cycle. Market attention is focusing on the dot plot to be included in the FOMC Summary of Economic Projections (SEP) and forecasts for GDP, the unemployment rate, and inflation.

An analysis has been raised that the main cause of the recent rise in long-term Treasury yields is fiscal deficits rather than inflation. This problem is difficult to solve with the Fed's monetary policy alone, and fiscal policy efforts such as Congress cutting spending, raising taxes, or boosting growth must come first. It is emphasized that the Fed has no direct control over the fiscal deficit problem, so there are limits to solving it.

In a survey of the American public, opposition to AI data center construction was higher than support, at 7 to 3. As residents' fierce opposition grew over noise and environmental problems from operating data centers, politicians responded sensitively by making it a midterm election issue, and companies also lowered their stance.

As the East-West pipeline and major straits were blocked, detours around Africa increased, greatly extending voyage days from 18-20 days to about 48 days. This situation is having a positive impact on tanker shipping ETFs and shipping company stocks, and in fact, an ETF investing in freight rates rose eightfold compared with the start of the year.