In a Nutshell: Our Newest Big Threat

The majority of stocks in the S&P 500 have announced their first-quarter results and, so far, the average sales and earnings surprises are running at 3.7% and 23.2% (respectively above consensus analyst estimates).  This is why analysts are so busy revising their consensus 2nd quarter estimates higher, and why equities continue increasing in price.

Since many companies are also awash in cash, stock buy-back announcements have also soared. According to The Financial Times $484 billion in stock buy-backs have been announced during the first four months of this year!  This is the biggest surge in stock buy-backs in two decades (according to Goldman Sachs).  In absolute terms 2021’s “buy-back bonanza” is expected to increase at least 35% vs. a year ago.  Due to low interest rates many companies can also borrow in the bond market at ultralow rates. Issuing new bonds to refinance existing corporate debt, as well as to buy back outstanding shares, increases expectations that this trend may continue for some time.

Let’s also face it, there is a lot of chaos in the world, and the market is reacting to it.  However, historically the market usually rises, month after month – even during most weeks.  Many of my colleagues on Wall Street predicted that sales and earnings momentum would peak in the first quarter, but those predictions may have been premature.  Second quarter results look like they could surpass the first quarter and help sustain this significant earnings momentum.

As if we did not have enough to worry about, America’s fragile cyber infrastructure may become the market’s newest big threat. Our energy sector has shown once again how vulnerable it is to natural and man-made events, specifically the shutdown of the Colonial Pipeline. That shutdown was resolved after making a $5 million ransomware payoff (in difficult-to-trace cryptocurrency). However, the Wall Street Journal (June 8th front page) noted that U.S authorities were able to recover almost half of that bitcoin payment!

Immense pressure was faced by the Georgia-based operator to get gasoline and jet fuel flowing again to major cities along the Eastern Seaboard.  The hackers, whom the FBI said are linked to a group called DarkSide, specialize in digital extortion and are believed to be located in Russia or Eastern Europe.  Fuel availability was affected in 13 states (Texas, Louisiana, Mississippi, Alabama, Tennessee, Georgia, South and North Carolina, Virginia, Maryland, Delaware, Pennsylvania, and New Jersey) plus Washington DC.

Unfortunately, Ransomware and Business E-Mail Compromise (BEC) have become two huge cyber security concerns for businesses of all sizes, public as well as privately owned.  While these threats have been around for many years, both are becoming more prevalent.  All businesses of any size have likely realized the need to add multiple layers of protection as well as detection in hopes of preventing an attack from being successful, or to quickly identify the presence of malware if attacks are successful. This threat has forced most businesses to have backups as well as Cyber insurance (which includes technical help to remediate in the event of an accomplished Cyberattack).

The only positive takeaway is that so far these attacks, even large ones like the Colonial Pipeline, have had no material impact on the stock market.  However, this should serve as a major wake up call to all federal, state, and local authorities about potential inadequate preparedness.  It may take something on a much larger scale to materially disrupt the financial markets.  Hopefully America can become better prepared to minimize the damage created by the next significant cyberattack. 

The proposed infrastructure spending bill (if this bill could become focused primarily on infrastructure improvement issues) might also take aim at rapid response systems to restore transportation, power, water, as well as communications (including internet services) if they were taken down by future cyberattacks (or whatever).