One of the biggest threats to our markets isn’t financial.
Back in the relatively-unplugged days of the early 1980’s, a little movie called “WarGames” raised the specter of a new potential threat in the American consciousness: the suggestion that a Regular Joe with a desktop computer could hack into the U.S. network and propel us towards a nuclear war. At its release, the idea of a high school computer genius launching a cyberattack against a superpower government may have seemed like science fiction.
The science fiction of yesterday has become the reality of today. While there were many lessons to be extracted from the 2016 presidential election, the most pointed lesson we continue to examine is our national vulnerability to cyberattacks.
We’re more aware of the potential threat of a cyberattack than in previous years.
And if those attempts to breach are successful, it could lead to the next major market event. Cybersecurity ranks as the top threat to market stability, even more than a looming trade war with China and geopolitical instability.[i]
The Office of Financial Research raised the issue in its 2017 Financial Stability report, saying, “A large-scale cyberattack or other cybersecurity incidents could disrupt the operations of one or more financial companies and markets and spread through financial networks and operational connections to the entire system, threatening financial stability and the broader economy.”[ii] By September 2018, the Depository Trust & Clearing Corp (DTCC) reported that threats to cybersecurity “have grown to a point where they may have become the most important near-term threat to financial stability.”[iii]
We’ve already witnessed market effects following cyberattacks on individual companies. Facebook experienced a spectacular fall in 2018, losing around $13 billion in value after a data breach affecting 50 million users. [iv] The company ended the year down about 25 percent. [v]
The looming threat experts are warning us about is bigger in scale. The biggest potential for cyberattack lurks in the utility, energy and defense industries. Gaping cybersecurity holes in our infrastructure make essential systems vulnerable to hackers. While the financial industry has spent an enormous amount of time and money on defense, a breach of the global financial system is an alarming possibility.
These threats aren’t coming just from some teenager in his parent’s basement. Extremist factions, foreign governments, and any number of underground groups are looking for ways in.
And they’re frequently finding access through the back door. Russian operatives, for example, attempted an attack on a variety of U.S. targets in 2016, including critical targets in energy, nuclear, water and more. Initial access was made by infecting small, less-secure commercial third-party networks with malware. The intent was to use the malware as a gateway to bigger targets.[vi]
The good news? None of the cyberattacks has had widespread market effects yet. Financial regulators continue to make cybersecurity a focus; FINRA recently rated cybersecurity as one of their biggest risks and top priorities.[vii]
The U.S. Government is also upping its digital defense game. Last November, President Trump signed an act establishing the Cybersecurity and Infrastructure Security Agency (CISA). The purpose of the agency is to “lead the national effort to defend critical infrastructure against the threats of today, while working with partners…to protect against the evolving risks of tomorrow.” [viii]
[i] Bob Pisani. CNBC. Dec. 11, 2018. “Cybersecurity, trade tensions rank as top threats to markets in 2019, survey finds.” https://www.cnbc.com/2018/12/11/cybersecurity-trade-war-rank-as-top-threats-to-2019-markets-survey.html Accessed Jan. 24, 2019.
[ii] Office of Financial Research. Dec. 2017. “2017 Financial Stability Report.” https://www.financialresearch.gov/financial-stability-reports/files/OFR_2017_Financial-Stability-Report.pdf Accessed Jan. 24, 2019.
[iii] Depository Trust & Clearing Corp. Sept. 2018. “The Next Crisis Will Be Different: Opportunities to Continue Enhancing Financial Stability 10 Years After Lehman’s Insolvency.” http://www.dtcc.com/~/media/Files/Downloads/WhitePapers/Systemic-Risk-White-Paper-962018.pdf Accessed Jan. 24, 2019.
[iv] Kevin Kelleher. Fortune. Sept. 28, 2018. “Facebook Loses Around $13 Billion in Value After Data Breach Affects 50 Million of Its Users.” http://fortune.com/2018/09/28/facebook-stock-falls-after-security-breach/ Accessed Jan. 25, 2019.
[v] Sara Salinas. CNBC. Dec. 31, 2018. “A year ago the FAANG stocks were a hot buy – here’s where they stand heading into 2019.” https://www.cnbc.com/2018/12/31/faang-stocks-2018-performance.html Accessed Jan. 24, 2019.
[vi] Sophie Tatum. CNN. Mar. 17, 2018. “US accuses Russia of cyberattacks on power grid.” https://www.cnn.com/2018/03/15/politics/dhs-fbi-russia-power-grid/index.html Accessed Jan. 25, 2019.
[vii] FINRA. Dec. 2018. “Report on Selected Cybersecurity Practices – 2018.” http://www.finra.org/sites/default/files/Cybersecurity_Report_2018.pdf Accessed Jan. 24, 2019.
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