Stock-Market Insiders Are Sitting Out the Rally in 2024

Stock investors have been riding a wave of optimism as the S&P 500 surged to its best performance in the first nine months of a year since 1997. The index has climbed 21% in 2024, hitting 43 record closes along the way. A large part of this rally has been fueled by investor excitement over tech stocks, particularly those poised to benefit from advancements in artificial intelligence. This tech-driven momentum eventually broadened into a wider market rally, as many believed the Federal Reserve had successfully cooled inflation without causing significant economic damage.

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However, despite this bullish sentiment, some well-informed investors are showing signs of caution. Corporate insiders—executives and board members who should have deep insights into their companies’ futures—have been hesitant to buy shares of their own companies. According to InsiderSentiment.com, only 15.7% of U.S. companies with insider transactions in July reported net buying of shares by officers or directors. While this figure ticked up to 25.7% in August, it fell again to 21.9% in September, remaining below the 10-year average of 26.3%. This level of insider buying is the lowest it has been in a decade.

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Followers of insider sentiment often look to these trades as signals of broader market trends. Executives and board members, being close to the internal workings of their companies, are considered to have a better understanding of the business landscape. When insiders are buying shares, it’s generally viewed as a positive indicator, suggesting they believe their companies have strong future prospects. Conversely, when insiders are selling or not buying, it may signal concerns about future stock performance.

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Recent insider activity hasn’t been encouraging. Berkshire Hathaway, led by Warren Buffett, has been increasing its cash reserves, a move that suggests a more cautious outlook. Additionally, prominent tech executives such as Amazon’s Jeff Bezos and Meta’s Mark Zuckerberg have sold billions of dollars worth of shares in their respective companies this year.

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Nejat Seyhun, a professor at the University of Michigan’s Ross School of Business and an adviser to InsiderSentiment.com, emphasized that insider trading is often a strong predictor of future stock returns. He believes that the below-average insider buying indicates that future stock returns may also fall below expectations. Seyhun attributes this caution to concerns about a potential recession, which would typically lead to a significant drop in stock prices. While economic data has been relatively positive, with inflation easing and consumer sentiment improving, there are still signs of underlying stress. The unemployment rate has ticked up earlier this year, and lower-income consumers are showing signs of financial strain.

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Despite these concerns, the stock market has continued to perform well, quickly rebounding from any minor pullbacks. Investors have largely shrugged off potential risks, focusing instead on the AI-driven tech rally and the belief that the Fed’s actions have been effective in curbing inflation without derailing economic growth.

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Still, some prominent figures, like JPMorgan Chase’s Chairman and CEO Jamie Dimon, are less optimistic. Dimon has warned that the economic outlook might be more challenging than many investors realize. In May, he expressed cautious pessimism about the risks facing the global economy and suggested that his bank’s stock might be overvalued.

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As the third-quarter earnings season begins, investors will be closely watching for insights from banking executives. Companies like JPMorgan, Wells Fargo, and Bank of New York Mellon are scheduled to report earnings soon, with Bank of America and Goldman Sachs following shortly after. These reports will provide a clearer picture of how the financial sector is navigating the current economic environment and what executives anticipate for the future.

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While some investors rely on insider trading as a market indicator, others argue that it’s not always an effective signal. They point out that insiders may sell shares for reasons unrelated to a company’s performance, such as diversifying their portfolios or freeing up cash. Still, a review of insider buying activity, which excludes sales, shows little enthusiasm. Officers and directors of U.S. companies bought $2.3 billion worth of their companies’ stock through September 2024, the lowest amount since 2014. In comparison, they purchased $3 billion over the same period last year.

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During the market selloff triggered by the COVID-19 pandemic in early 2020, insiders were quick to buy up shares, viewing the market dip as an opportunity. In March 2020 alone, insiders purchased nearly $1.3 billion in stock. Eric Diton, president and managing director of Wealth Alliance, said that insider buying during this time gave his firm the confidence to invest in the stock market amid extreme uncertainty.

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This year, however, the largest insider trades have been sales, particularly by leaders of big tech companies. Jeff Bezos has sold $10.3 billion worth of Amazon stock, Michael Dell has sold $5.6 billion of Dell Technologies shares, and Mark Zuckerberg has sold $2.1 billion in Meta stock. Despite these large sales, shares of all three companies have seen double-digit gains in 2024.

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In conclusion, while stock investors have been overwhelmingly optimistic this year, corporate insiders appear to be more cautious. Their reluctance to buy shares of their own companies could be a sign of concerns about the future, particularly with potential economic risks still looming. As the market continues to climb, it remains to be seen whether this insider caution will translate into broader market trends.

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