By Lu Wang and Elaine Chen
From stretched valuations to Federal Reserve tapering and a resurgence of COVID virus variants, there is no shortage of worries for stock investors. But anyone feeling tempted to bail might consider this: executives in charge of US companies are stepping up their purchases.
Corporate insiders, whose buying correctly signalled the bear market bottom in March 2020, are not afraid of chasing the record-setting rally. More than 1000 corporate executives and officers have snapped up shares of their own firms in August, the most since May of last year, according to data compiled by the Washington Service.
The bullishness comes at a time when strategists across the US keep warning that a major correction is on the horizon.Credit: Bloomberg
While sellers also rose from July, the increase came at a lower rate than buyers. As a result, insider purchases climbed to the highest level in a year relative to sales.
The willingness of business leaders to dive into a market where equity values have doubled in 17 months can be viewed as a vote of confidence in their growth outlook. That faith is sure to lend support to bulls at a time when strategists from Morgan Stanley to Stifel Nicolaus keep warning that a major correction is on the horizon.
“There’s no one closer to what’s going on in corporate America than the insiders, right?” said Ryan Detrick, chief market strategist at LPL Financial. “So to see insiders buying, in our opinion, is one of the more bullish things that we can see out there because they’ve got the pulse of our economy right in front of them.”
Of course, insider demand is nowhere near the height during the pandemic trough, when buyers outpaced sellers by a ratio of 2-to-1. Still, at 0.40, it’s an improvement from earlier this year, when the buy-sell ratio dipped to a record low of 0.19.
To be sure, not all data on insider transactions is as sanguine. Insiders bought $US124 million ($169 million) worth of shares in August through to last Friday, up 10 per cent from the previous month, according to Securities and Exchange Commission filings for US-listed corporations compiled by Bloomberg. Selling by the group, however, jumped more, at 59 per cent.
But a closer look showed that the aggregate disposals were dominated by Alphabet and Carlyle Group, with insiders at the two firms accounting for more than half of the total. In other words, a few big selling orders likely skewed the numbers.
While the $US28 trillion rally has crushed bears, caution is quietly building among investors. They have sought protection in options and flocked to defensive shares like health care and steady growers such as technology in recent months.
Mike Wilson, the chief US equity strategist at Morgan Stanley, is one of the most outspoken sceptics to question the lasting power of the relentless rally. The way he sees it, after the initial snap-back out of the pandemic-induced recession, the market has entered a phase where growth is at an inflection point, where either too cold or too hot an economy can be trouble for stocks.
‘To see insiders buying, in our opinion, is one of the more bullish things that we can see out there because they’ve got the pulse of our economy right in front of them.’
Ryan Detrick, LPL Financial
Specifically, a continued strengthening economy and inflation would prompt the Fed to fasten monetary tightening, leading to higher interest rates and low equity valuations, he says. Alternatively, disappointing growth could prompt a wave of earnings downgrades.
“Bottom line, this fall we still expect our mid-cycle transition to end with a 10 per cent-plus S&P 500 correction,” Wilson wrote in a note to clients.
But the market hasn’t been kind to bears. The S&P 500 has gone 10 months without a 5 per cent pullback, not to mention a 10 per cent drop. Since the start of the year, the benchmark has also made 53 record highs, jumping 20 per cent along the way.
Credit the market buoyancy to policy support or blind buying from retail investors, but one key pillar of this bull market is corporate earnings.
The improving insider sentiment toward their own stock followed one blockbuster reporting season where almost 90 per cent of companies in the S&P 500 exceeded analysts’ profit estimates - a pace with no precedent. And that should not be taken lightly, according to Detrick at LPL Financial.
“It’s something we absolutely think should comfort your average investor,” he said. “The insiders are buying at all-time highs, likely saying they have confidence in the bull market and the economy going forward.”
Bloomberg
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