We are a couple of weeks shy of completing the first quarter of 2020 and the year has already defied everyone's expectations due to a slew of unexpected developments like the coronavirus outbreak and the oil crash. Additionally, many stocks were priced at high valuations due to a decade-long plus bull market and a strong 2019 which ended with the belief that global growth was bottoming and about to re-accelerate.
Unfortunately, now markets are facing two risks that have the possibility for dangerous, knock-on effects. This means an extended period of volatility, where investors should focus on preserving capital rather than earning big returns. It's also a good time to focus on building positions in stocks or sectors with strong and improving fundamentals that can be acquired at a discount due to unfavorable market conditions.
Cybersecurity Secular Growth
The cybersecurity sector is one good candidate. It's in a secular growth trend as opposed to something in a cyclical trend. Secular trends persist for years if not decades and continue in all types of economic cycles. Examples include smartphone adoption, the movement to remote work, and spending on cloud computing. Cyclical trends are more affected by the economic cycle and often happen when secular trends fully mature. Examples include new car sales or steel production and consumption.
Cybersecurity is in a secular trend. Corporate spending on cybersecurity is growing at a double-digit rate and is projected to grow double-digits for the next decade. Over the past 13 years, cybersecurity spending has increased by 30x. In comparison, the U.S. economy has grown between 1% and 3% over the past decade annually.
As companies and governments migrate more data and processes to cloud servers, strong cybersecurity becomes more imperative. There's also the possibility that governments may mandate certain cybersecurity protocols for large organizations that could drive a boom in spending just like they have regulations for all types of matters.
Cybersecurity will increasingly become an integral part of national defense as future wars may be fought in an entirely different arena. Until now, wars and defense spending have created massive booms for aerospace and defense stocks. In the future, cybersecurity stocks could see similar booms.
The easiest way for investors to gain exposure to this sector is through the cybersecurity ETF (NYSE: HACK). It's down about 20% since the market top in late-February. On a longer-term timeframe, it's been range-bound between $32 and $42 since late-2018. Long-term trends are promising for the stocks in the sector but in the short-term, investors and traders should expect considerable volatility and the potential for lower prices due to most cybersecurity stocks having a high-multiple and high growth rate which makes them particularly vulnerable during bearish market conditions.