Happy New Year!
For our first post of 2022, we want we want to welcome everyone to a new year and analyze the momentum from the much-discussed “Santa Claus Rally” that started on Dec. 20, 2021.
Our readers know how “big money” institutional investments have been moving out of stocks since mid-November. But like so many times before in the post-pandemic world, selling suddenly vanished at the end 2021:
But how do we know if the coast is clear? We never know for sure, but history can often be a good guide looking forward in the immediate months ahead. Additionally, you can see in the below MAPsignals sector rankings table how volatility has subsided significantly over the last week as there is no extreme buying or selling in any sector:
The dramatic pause in overall selling has led to MAPsignals’ Big Money Index (BMI), a measure of institutional investor activity, beginning to increase slowly since Dec. 20:
Now turning our attention to history in order to chart a path forward, our friends at MAPsignals conducted a study we found to be extremely interesting. Looking only at stocks that investors can easily trade, when 15% or more of that universe is sold, significant upside usually follows. Here are such instances since late October 2020:
On the right side of the table are returns for SPY (an exchange traded fund that tracks the S&P 500) one day and one week after the selloffs. Clearly, positive returns follow selloffs most of the time. Since late 2020, SPY returns 0.80% a day after big selling and 2.54% a week later, on average.
That table is clear proof of two things:
- Markets were volatile in 2021
- Patience and fortitude pay off
Let's look at the most recent instance at the bottom of the chart on Dec. 20, 2021. So far, it mirrors most of the other instances and is on track for material growth since the extreme selling.
While we don't know yet if this momentum will continue into this month, there are tailwinds that we believe will continue this trend going forward in the short-term. And much of that has to do with virtually all the current stock market “fears” being likely to diminish in January.
For example, growth is returning and will be reported later this month. The Atlanta Fed’s GDPNow forecast is currently estimating 7.6% fourth quarter gross domestic product growth:
Also, crude oil prices are now moderating. Plus, Treasury bond yields have meandered a little bit lower, even after Federal Reserve Chairman Jerome Powell's recent comments about upcoming potential interest rate hikes.
Lastly, and most importantly, it appears that fears related to the Omicron variant of COVID-19 are beginning to abate quicker than expected. Information coming from South Africa and other countries seems to show the variant is less severe than others, in general.
For equity investors, these are all good signs. Thus, it seems we’ve maybe bounced off a “bottom” around Dec. 20, 2021. This all points to a near-term future that is better than the recent past.
Thematic Investment for 2022
Turning to a more thematic investment conversation to begin the new year, we wanted to touch on what we believe will be one of the strongest sector storylines in 2022 – cybersecurity.
Last year, cybercrime was one of the most prominent headline stories and wasn’t limited to hi-tech industries. Cyberattacks targeted a critical oil pipeline in the southeastern U. S., a meatpacking plant in Minnesota, a chain of convenience stores in England, gas stations in Iran, healthcare organizations worldwide, and many others.
We don’t want to glorify any of these attacks. They are a drag on society and economies worldwide. Their severity is why we think investing in cybersecurity organizations is smart, as there is likely to be robust industry-wide growth in the years ahead. Here’s why:
Risks Remain Elevated
Ransomware attacks alone have been prolific in 2021. Through only the third quarter of this year, researchers from SONICWALL identified 495.1 million global ransomware attacks.
This is a 148% increase compared to the previous year. Also, according to the Treasury Department, ransomware victims paid a record $590 million to cybercriminals during the first six months of 2021.
A Growing Digital World Needs Robust Cybersecurity
As the global economy continues to reopen, many digital connectivity trends such as ecommerce, remote work, and distance learning are proving more durable than expected. In our view, the ongoing popularity of these trends will likely be accompanied by heightened demand for cybersecurity solutions. As the world grows more digitally connected, the need to provide comprehensive cybersecurity solutions should extend far beyond the pandemic era.
Public Cybersecurity Spending Growth
Cybersecurity and data privacy remain a priority for government officials around the world. In the U.S., the proposed federal budget from the White House for 2022 includes $10.4 billion in new cybersecurity defense spending and an additional $9.8 billion in funding to secure federal civilian networks.
Elsewhere, the United Kingdom’s new national cybersecurity strategy includes £2.6 billion to strengthen the country's cyber ecosystem and resilience to cyberattacks. Leaders in Europe also adopted a plan with €269 million in new funding to build up cybersecurity equipment, tools, and infrastructure.
Governments around the world have applied regulatory pressure on companies to adhere to cybersecurity standards. As an example, failure to comply with the General Data Protection Regulation (GDPR), which is a sweeping European data privacy law that went to effect in 2018, has led to several significant enforcement actions, such as a €746 million fine imposed on Amazon in July 2021.
These fines are becoming more frequent. For the first 11 months of 2021, there were 37% more GDPR fines issued than during the same timeframe in 2020:
Failures as a Catalyst
This is an anecdotal, tongue-in-cheek observation about cybersecurity failures – when they occur, there seems to be a rush of buying in cybersecurity stocks. That said, cybersecurity stocks have generated relatively strong performance following the announcement of high-profile breaches.
So, while such failures may initially be viewed in a negative light, we think positive performance for cybersecurity stocks in the days that follow may be related to a recognition that such failures probably will induce more spending on cybersecurity. So, while cyberattacks are a drag on society and the economy, simultaneously they may be meaningful catalysts for cybersecurity stocks.
All in all, we believe these conditions could be a potent recipe for robust earnings growth in cybersecurity stocks in the years ahead and thus creates a strong thematic investment thesis within our portfolios.
Securities sold through CoreCap Investments, Inc., a registered broker-dealer and member FINRA/SIPC; advisory services offered by CoreCap Advisors, Inc., a registered investment advisor. Cornerstone Financial and CoreCap are separate and unaffiliated entities.