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Outside of all other context, Microsoft (NASDAQ: MSFT ) is, in my opinion, a candidate for a "forever" hold. However, no investment operates in a vacuum. Therefore, the massive 800-point plummet in the Dow Jones is an event you must consider when analyzing MSFT stock.
Let's start with the obvious. As a growth and technology play, Microsoft stock depends substantially on investor sentiment. Yes, it does pay a dividend. However, with a yield of only 1.4%, it's not nearly enough to justify an excessive position against a volatile backdrop.
Further, the reason for the broader market downturn is especially problematic for MSFT stock. Initially, the U.S.-China trade war started out in some ways as a political stunt. Bolstering his image as the "sheriff," President Donald Trump imposed tariffs on Chinese goods for various acts of malfeasance, particularly intellectual property theft.
However, the Trump administration may have miscalculated Beijing's resolve. With each side refusing to budge, then stepping up their retaliatory tariffs, the matter has seemingly spiraled out of control. On paper, that's pernicious for Microsoft stock. Outside of the U.S., China is the tech giant's biggest revenue stream .
As if that weren't enough, the constant back-and-forth between the two nations may have exacerbated domestic economic weaknesses. Recently, the benchmark yield curve inverted when the yield for 10-year Treasuries slipped underneath the 2-year yield. In other words, investors are getting less reward for accepting greater time risk.
It makes no sense. And not surprisingly, this dynamic represents a warning about a coming recession. Thus, investors see little reason to hold more "risk on" names like MSFT stock.
No Need to Panic on MSFT Stock Yet
Even with a preponderance of negative news items, it's still tricky to figure out what to do with a blue-chip name like Microsoft stock. Clearly, this is no time to load the boat with the company's shares. With multiple headwinds cascading down like rainwater, you don't want to be a premature contrarian.
That said, I also don't think it's a time to panic on MSFT stock. First, let's have a quick rundown about the yield-curve inversions and their implications. What this trend truly suggests is that the markets are very nervous about incoming events. Essentially, Wall Street is dealing with a math problem where key constants are replaced with variables.
If you never liked calculus class, you can appreciate the sentiment. However, the increase of variables does not necessarily mean that everything is going to Hades all at once. As Credit Suisse reported, it takes on average 22 months following a "2-10" yield-curve inversion to spark a recession. Therefore, we may have some time to work things out.
Optimists may note that next year is a key presidential election cycle. Thus, even a tough sheriff like Trump sees the value of seeking a peaceable solution. Naturally, that would bode very well for Microsoft stock, along with tech peers like Intel (NASDAQ: INTC ) and Amazon (NASDAQ: AMZN ).
And positive signs do exist. Unexpectedly, the president delayed a ramp up in tariffs until after the Christmas shopping season starts. That's an important acknowledgement that the White House recognizes our economy's global interdependence.
However, a trade war resolution may be some months off. In the meantime, stakeholders of MSFT stock can rely upon the underlying company's secular businesses, such as its dominance in endpoint management .
Challenges for Microsoft Stock Drive Efficiencies
Finally, I'd like to point out that a silver lining exists in this trade war malaise. Under bullish conditions, there's not as much incentive to push for corporate efficiencies. With the money flowing in, it's easy to get complacent.
However, in a distressed ecosystem, every dollar of revenue counts. That's why if you own MSFT stock, you've got to love Microsoft's new " outsourcing " license policy as it pertains to its cloud business.
Long story short, Microsoft is cutting a loophole that enables Amazon's and Alphabet 's (NASDAQ: GOOG , NASDAQ: GOOGL ) cloud customers to bring with them their existing Microsoft enterprise software licenses.
For years, Amazon promoted such "bring your own licenses" capabilities to prospective clients. This gave Amazon and Alphabet comprehensive usability at Microsoft's expense. Now, this loophole is closed, which should help Microsoft stock at least mitigate some volatility.
Still, it's probably going to be a rough ride in the coming months. If you have a large position in MSFT stock, a little trimming makes sense. Otherwise, if you're looking to buy in, wait. Almost certainly, we'll see a better entry point for this iconic tech firm.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
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