Insiders watch the bull market in US stocks coldly, Buffett and tech giants' executives are all fleeing
Internal personnel in American companies have shown a significant decrease in willingness to purchase company stocks, with the net purchase ratio in July dropping to a 10-year low of 15.7%. Although there was a slight rebound in August, it dropped again to 21.9% in September. Experts point out that insider trading below the average level may indicate that future stock returns will also be below average, reflecting executives' concerns about an economic recession. Despite the strong performance of the US stock market this year, with the S&P 500 index rising by 21%, executives remain cautious about the future economic situation
Corporate insiders have been reluctant to buy their company's stock. According to data from InsiderSentiment.com, only 15.7% of all U.S. companies where executives or directors traded stocks in July reported a net purchase of company stock. This is the lowest level in the past 10 years. The figure rose to 25.7% in August, dropped to 21.9% in September, far below the 10-year average of 26.3%.
The proportion of U.S. corporate executives or directors buying company stock is far below the 10-year average level.
Those who pay attention to the sentiment of corporate insiders believe that the trades of company executives and directors should reflect their understanding of the prospects of their own business, providing signals about the future performance of the entire market. However, this signal has not been optimistic in recent months.
"Insider trading is a very powerful predictor of future stock returns," said Nejat Seyhun, a professor at the Ross School of Business at the University of Michigan, "and the fact that it is below average indicates that future stock returns will also be below average."
Seyhun, an advisor to InsiderSentiment.com, believes that corporate insiders are concerned about an economic recession, which typically leads to significant stock price declines. While economic data overall looks good, with cooling inflation and improved consumer confidence, signs of rising unemployment earlier this year and pressure on low-income consumers have been observed.
Since 2024, U.S. stocks have risen significantly and have always been able to quickly recover from any pullback. As many investors increasingly believe that the Fed has controlled inflation without causing significant economic damage, the rise in tech stocks that could benefit from the prosperity of artificial intelligence has evolved into a broader trend. The S&P 500 index has risen 21% year-to-date, setting 43 closing records along the way.
Performance of the S&P 500 index year-to-date
Jamie Dimon, Chairman and CEO of JP Morgan, a well-known executive on Wall Street, has also warned that the future economic path may be much more difficult than many investors think. In May of this year, Dimon expressed cautious pessimism about the risks facing the global economy and believed that JP Morgan's stock price was too high.
As the new round of earnings season for U.S. stocks officially kicks off later this week, investors will be paying attention to the views of banking executives on the economy. JP Morgan, Wells Fargo, and Bank of New York Mellon will be the first to announce their results on Friday, while Bank of America and Goldman Sachs' earnings will be released on October 15.
Some investors believe that selling company stock by insiders is not an effective indicator. They argue that shareholders may sell stocks to diversify their portfolios or release cash, rather than due to negative views on the stock. **
Setting aside stock sales, a survey shows that corporate insiders have shown little enthusiasm for stock purchases recently. According to data from Washington Services, as of September this year, executives and directors of US listed companies have collectively purchased $2.3 billion worth of company stocks, the lowest amount for the same period since 2014. Last year, they purchased $3 billion in the first 9 months.
Amount of stock purchases by corporate insiders
During the US stock market sell-off triggered by the COVID-19 pandemic at the beginning of 2020, corporate insiders were rushing to buy stocks, purchasing nearly $1.3 billion in March alone. Some investors viewed this as a reassuring signal.
"The purchases by insiders give us confidence to invest in the stock market during challenging times," said Eric Diton, President and Managing Director of Wealth Alliance.
However, this year, the largest insider trading activity has been the selling off by top executives of large tech companies.
Amazon's founder and CEO Bezos sold stocks worth around $10.3 billion this year, while Dell Technologies Chairman and CEO Michael Dell cashed out $5.6 billion, and Meta's founder, Chairman, and CEO Zuckerberg cashed out $2.1 billion. The stock prices of these three companies have all seen double-digit percentage increases this year.
Chairman Peter Thiel of Palantir Technologies and CEO Jensen Huang of NVIDIA are also among the tech company executives selling off stocks. The stock prices of these two companies have more than doubled in 2024.
Another development that has raised concerns among some market observers is that a prominent investor is hoarding cash.
The latest filings from the SEC show that Warren Buffett's Berkshire Hathaway recently sold stocks, significantly reducing its Apple holdings. By the end of June, the cash reserves of this company based in Omaha, Nebraska, had increased to $276.94 billion.
David Harden, CEO and Chief Investment Officer of Summit Global Investments, stated, "Investors should take note. I don't think he is trying to time the market, looking for opportunities to buy on dips. He may be saying, 'This is overvalued, I prefer cash over this investment.'"