The leaders of Corporate America are cashing in their chips as doubts grow about the sustainability of the longest bull market in American history.
Corporate insiders have sold an average of $600 million of stock per day in August, according to TrimTabs Investment Research, which tracks stock market liquidity.
August is on track to be the fifth month of the year in which insider selling tops $10 billion. The only other times that has happened was 2006 and 2007, the period before the last bear market in stocks, TrimTabs said.
Investors often view insider buying and selling — transactions performed by top executives, leading shareholders and directors — as a signal of confidence. Even though the stock market is much larger than it was in 2007, so the $10 billion mark may not mean as much now as it did then, the acceleration of insiders heading for the exits could indicate concern about the challenges ahead, especially as the US-China trade war threatens to set off a recession.
“It signals a lack of confidence,” said Winston Chua, an analyst at TrimTabs. “When insiders sell, it’s a sign they believe valuations are high and it’s a good time to be outside the market.”
Recession fears have ignited a burst of market volatility over the past year, punctuated by the worst December since the Great Depression. Although the S&P 500 remains up 14% in 2019, markets have tumbled in August as the trade war escalated. The Dow dropped 623 points, or 2.4%, on Friday. It regained about a third of those losses Monday.
Heavy insider selling is often considered an ominous signal about a given company because execs presumably have a better idea about where the stock is going than the average investor. The thinking is that if they thought the stock was going straight up, they wouldn’t leave cash on the table by selling.
But Nicholas Colas, co-founder of DataTrek Research, noted insider selling is not always a helpful indicator at a high level. Rather than reflecting a lack of confidence, he said, the selling may simply be the result of insiders bracing for leaner compensation.
“Most managers get paid on earnings growth. If they anticipate bonuses will be slower, they will sell stock to make up the gap,” Colas said. “It’s one more sign that managements know this will be a tough year for growing earnings.”
Other executives may sell stock to diversify their holdings or to raise money to pay taxes. To avoid tripping insider trading rules or spooking shareholders, some executives schedule periodic stock sales.
Still, the TrimTabs report makes it clear that insiders are selling more than they have at any other point during the bull market, which began in March 2009.
Buybacks, another sign of confidence, have also slowed, albeit from extremely elevated levels.
US companies announced $2 billion of buybacks per day during earnings season, according to TrimTabs. That’s the weakest pace in two years.
Completed buybacks by S&P 500 companies declined 13% during the second quarter to $165.7 billion, according to S&P Dow Jones Indices. However, buybacks remain above the pace of 2017, the final year before the Republican tax law that created a huge windfall for companies.