A strong economy and Federal Reserve interest rate cuts have given investors a big boost of confidence. The New York Times reported that the S&P 500 is more than 20% higher than the Wall Street consensus for all of 2024.
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But even as stocks rally and keep breaking records, certain corporate insiders, including Warren Buffett and Jeff Bezos, are sitting this one out. Here’s why Buffett and Bezos, among others, are exercising caution during the stock market rally.
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Insiders Might Be Worried About a Recession
Of all U.S. companies with a transaction by an officer or director in July, InsiderSentiment.com revealed that only 15.7% reported net buying of company shares — the lowest level in a decade. This figure moved up to 25.7% in August and fell to 21.9% in September. The 10-year average is 26.3%. Additionally, MarketWatch reported in July that corporate insiders were selling their companies’ shares at the fastest rate in at least 10 years.
Nejat Seyhun, a professor at the Ross School of Business at the University of Michigan and an adviser at InsiderSentiment.com, explained to The Wall Street Journal that he believes corporate insiders are worried about a recession.
Economic data and consumer sentiment have improved while inflation has cooled, but the unemployment rate moved higher earlier this year, and The Wall Street Journal pointed out that there have been signs of financial difficulty among lower-income consumers.
In May, JPMorgan Chase chairman and chief executive Jamie Dimon also stated that he was cautiously pessimistic about risks to the global economy and thought the bank’s stock price was high.
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Is Insider Selling an Effective Indicator?
Some investors believe that insider selling as an indicator isn’t very effective, as stockholders might sell shares to diversify their portfolios or free up cash. However, according to The Wall Street Journal, some believe that the trades of company executives and board members are indicative of the stock market’s future performance as a whole.
“Insider trading is a very strong predictor of aggregate future stock returns,” Seyhun explained to The Wall Street Journal. “The fact that they are below average suggests that the stock returns in the future will be below average as well.”
The Wall Street Journal reported that this year, the largest trades by insiders have been sales by leaders of big tech companies, which are up by double-digit percentages this year. Berkshire Hathaway, run by Buffett, has been selling stocks and building a larger cash position, while big tech company leaders — like Bezos at Amazon and Mark Zuckerberg at Meta Platforms — have sold billions of dollars’ worth of their companies’ shares this year.
What could this mean?
The Motley Fool pointed out that Buffett is sitting on a record cash and Treasury pile of $277 billion as of June 2024, meaning he might not see a lot of great opportunity in the stock market. As The Motley Fool noted, valuations are high and future expected market returns don’t look as good.
David Harden, chief executive and chief investment officer of Summit Global Investments, told The Wall Street Journal that investors should take notice. “I don’t think you’d say he’s trying to time the market and look for pullbacks, but I am thinking he’s saying, ‘This is overvalued, and I value cash more than I value this investment,’” Harden said.
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This article originally appeared on GOBankingRates.com: Why Warren Buffett and Jeff Bezos Are Exercising Caution During the Stock Market Rally