Corporate insiders are reluctant to buy back their own stock. According to InsiderSentiment.com, only 15.7% of U.S. companies whose officers or directors traded in July reported net purchases of their own stock. This is the lowest level in the past 10 years. This figure rose to 25.7% in August, but fell to 21.9% in September, well below the 10-year average of 26.3%.
Adherents of the insider sentiment believe that the trades of company executives and directors, who are supposed to be well-informed about the prospects of their companies’ businesses, can provide signals about the future performance of the market as a whole.
In recent months, the signs have not been encouraging. These aren’t the only warning signs. Warren Buffett’s Berkshire Hathaway is building up its cash position. Leaders of major tech companies, including Amazon.com Inc.’s Jeff Bezos and Meta Platforms Inc.’s Mark Zuckerberg, have sold billions of dollars worth of stock this year.
“Insider trading is a very strong predictor of total future stock returns,” said Nejat Seihun, a professor at the University of Michigan’s Ross School of Business. , suggesting that future stock returns will be lower.” Also below average. ”
Seihun, an advisor to InsiderSentiment.com, said he believes company insiders are usually concerned about a recession, which causes a large drop in stock prices. Economic indicators are generally fair, with inflation subdued and consumer sentiment improving.
But unemployment rose earlier this year, and there are signs of tension among lower-income consumers.
So far in 2024, stock prices have risen and quickly recovered from declines. Many investors have become convinced that the Federal Reserve has reined in inflation without significantly damaging the economy, leading to a rush into tech stocks that could profit from the artificial intelligence boom. It turned into a broader rally. The S&P 500 rose 21%, setting 43 closing price records along the way.
JPMorgan Chase & Co. Chairman and CEO Jamie Dimon is among prominent executives warning that the economic path ahead could be more difficult than many investors think. It is. Mr. Dimon said in May that he was cautiously pessimistic about risks to the global economy and believed the bank’s stock was expensive.
As earnings season begins in earnest later this week, investors will be watching for economic insights from bank executives. JPMorgan, Wells Fargo & Co. and Bank of New York Mellon are scheduled to report on Friday, followed by Bank of America and Goldman Sachs on Oct. 15.
Some investors believe that insider selling is not an effective indicator, and shareholders may exit shares to diversify their portfolio or conserve cash rather than due to a negative view of the stock. It is claimed that there is.
Regardless of sales figures, there hasn’t been much enthusiasm lately for reviewing insider purchases. Officers and directors of U.S. companies bought $2.3 billion in company stock through September, the lowest amount in that period since 2014, according to data from the Washington Service. Last year, they bought $3 billion in the first nine months.
During the pandemic-induced stock market sell-off in early 2020, insiders scrambled to buy up shares, buying up nearly $1.3 billion in March alone. Some investors took this as an encouraging sign.
“Insider buying gives us the confidence to put money into the stock market during an extremely difficult time,” said Eric Diton, president and managing director of Wealth Alliance.
This year, the biggest insider trades were sales by leaders of large tech companies.
Bezos, founder and executive chairman of Amazon, sold about $10.3 billion worth of stock, Michael Dell, chairman and chief executive of Dell Technologies, sold $5.6 billion and chairman and chief executive officer of Meta ( CEO Zuckerberg sold $2.1 billion. According to data from the Washington Service. All three companies have seen double-digit increases in their stock prices this year.
Palantir Technologies Chairman Peter Thiel and NVIDIA CEO Jensen Huang are also among the top sellers. Both stocks more than doubled in 2024.
Another development that has some observers questioning the market’s outlook is the pile-up of cash by high-profile investors.
Buffett’s Berkshire Hathaway has reduced its large stake in Apple by selling shares in the most recently disclosed period. The Omaha, Nebraska-based company’s cash pile totaled $276.94 billion at the end of June.
“Investors should take note,” said David Harden, chief executive and chief investment officer at Summit Global Investments. “I don’t think he’s trying to time the market for a pullback. Probably not, but I think that’s what he’s saying.” “This is overvalued. I value the cash more than this investment.”
Email Karen Langley at karen.langley@wsj.com.
