Could the Crowdstrike-Microsoft outage lead to a multi-week market selloff?
The 'largest IT outage in history' could lead to some profit taking in technology companies.
It has been an eventful week - an assassination attempt on a US presidential candidate and the ‘largest IT outage in history’ are giving investors some reason to trim equity holdings.
Significant economic and reputational impact
The Crowdstrike outage has left a widespread and meaningful impact on the global economy, affecting industries and services worldwide.
To name a few, there were numerous flight delays across airports, unprocessed transactions in banks and financial institutions, trading problems in stock exchanges, cancelled appointments in hospitals, unattended emergency telephone lines, and disruption of ticket sales. It is a fluid situation and as of this writing, companies are still running investigative checks to ensure that the impact is limited.
Apart from Crowdstrike Holdings Inc, insurance companies will also pay a hefty price for the damage done.
The outage serves as a reminder of the global economy’s heavy reliance on digital systems and the potential disruptions when systems fail. It highlights the need for more stringent testing protocols and risk management strategies to ensure the resilience of IT infrastructure. Perhaps, what we need in future is a hybrid IT infrastructure system that involves a collaboration between both physical (using pen and paper) and virtual resources.
Time to buy Crowdstrike Holdings?
Crowdstrike CEO went to social media and national TV to apologise for the disruption but received alot of hard questions and negative comments.
The company stock gapped down at 294 at the market open on Friday, and bargain hunters came in and lifted the price to 304 at the close. Price action suggest that the stock may face continued downward pressure so I don’t think it is a buy.
Fundamentally, we don’t really know the full extent of the potential lawsuits that could surface over the next few days against Crowdstrike. The company’s reputation has been damaged, and this would have an impact on its future revenue.
If you are keen on cybersecurity firms, I would suggest looking at Crowdstrike’s rival companies (Check Point Software Technologies, Palo Alto networks…etc.) because they will likely scoop up more market share from this incident.
Time to trim tech? The sector has outperformed over the last 5 years
The NASDAQ 100 Index, which is mainly made up of technology stocks (more than 60%), has fared better than the Dow Jones Industrial Average (leading US blue chip firms) and Russell 2000 Index (small cap companies) since 2019.
Valuations for tech firms are pretty stretched and it may be time for a new market leadership. NVDA for instance, is trading at a P/E multiple of 70x versus 29x of the S&P 500 Index. Recently, market breath has widened, and we are seeing a pickup in returns across various sectors.
Here is another reason for trimming stocks and profit taking. Seasonally, the VIX (CBOE Volatility Index), a key measure of market expectations of near-term volatility, tends to trend upwards between August and October. The VIX Index and the S&P 500 move in opposite directions. What this means, is that investors are generally more jittery during the third quarter, so it calls for some caution in the near term.
Bond market is also nervous as we tether on the edge of rate cuts
As we proceed towards the July FOMC meeting at the end of the month, Fed fund futures are pricing in an increased probability of a rate cut in September. Yet given the steady rise in unemployment in the US job market, I think that the Federal Reserve may cut interest rates in July which would take the market by surprise.
Yields on US 10-year Treasury notes have fallen, and we could see lower yields over the next few days. I maintain my view that interest rates could remain high (above 3%) towards the end of 2024 and would look at longer duration bonds in 2025 (after the new US President has been announced). Selling pressure on long maturities have not abated.
Portfolio Update
My view is that the market is in the midst of a long term bull trend, and we are in the midst of a transition towards a new market leadership (potentially from tech to large and small non-tech firms).
However, sentiment has been dampened by the recent significant IT outage and the portfolio has locked in profit on positions in WPM (Wheaton Precious Metals) for a 13% gain. I also traded EXK for a 2.29% gain.
Disclaimer
Seven Fat Cows is not a financial adviser. You should seek independent legal, financial, or other advice to check if the information from this website relates to your unique circumstances.