Insider info on the state of the stock market

Insider info on the state of the stock market
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Stock markets are flying near all-time highs in 2019. The Dow-Jones Industrial Average is up more than 20 percent since Christmas. Broad market indices are also up similarly, 20 percent or more. The S&P 500 Index is up close to 24 percent while the NASDAQ is up more than 30 percent since Christmas.   

What is putting investors in such a cheerful buying mood? What can we learn from these recent price increases?  Is this the right time for us to jump in?

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One possibility is that the U.S. economy’s fundamentals are strong, and they are expected to remain strong for the near future, more than justifying big increases in stock prices.

The unemployment rate recently went down to 3.6 percent, the lowest level in 50 years. Recent GDP growth figures beat expectations as well, with the first-quarter estimate clocking in at 3.2 percent. That was the strongest first-quarter growth in four years. 

Similarly, U.S. worker productivity in 2018 also came in at the best rate in almost a decade. So, there is a lot that the market can cheer.

This does not mean all’s well by any means. Global trade tensions are a constant threat to the markets. On Sunday, President TrumpDonald John TrumpTrump watching 'very closely' as Portland braces for dueling protests WaPo calls Trump admin 'another threat' to endangered species Are Democrats turning Trump-like? MORE announced his intention to increase tariffs on $200 billion of Chinese imports to 25 percent from 10 percent. 

The Chinese responded by suggesting that they might withdraw from the trade talks altogether (though they recently announced they will carry on). Any sign of a protracted trade war can turn the markets upside down in a flash. 

There is also the view that the market is on a sugar high from last year’s tax cuts and recent monetary stimulus. The national debt and budget deficit are big and growing. The U.S. posted the largest budget deficit in history last month, with the deficit coming in at $544 billion in the first five months of the fiscal year, up almost 40 percent from the same period last year. 

Then there is the end of monetary contraction and possible monetary stimulus: After a stock market hysteria, coupled with unprecedented White House criticism of the Federal Reserve for raising rates, quantitative tightening (QT) ended unexpectedly early after disposing only $450 billion in assets, leaving the Federal Reserve with still more than $2.5 trillion in excess assets. 

As a percentage of GDP, the Fed’s assets are still triple the amount they were in 2008. There is still a lot more QT left undone at this time. Certainly, if the markets wanted to worry, there is a lot to worry about.

Against this backdrop, we wanted to know what the insiders — top corporate executives — are thinking about the stock market. Insiders are allowed to buy and sell shares in their own firms as long as they report their transactions to the Securities and Exchange Commission within one business day. 

Decades of academic research shows that insiders as a group are astute traders, and they typically beat the market when they buy and sell shares in their own firms.

The figure below shows the aggregate insider buying patterns in all publicly-listed U.S. firms over the past two years. The upshot is that insiders are not much impressed with the current market’s prospects. 

Over the past two years, the average insider's buying activity has averaged about 25 percent, which is slightly below the 10-year average of 27 percent.

Insiders did cheer the market swoon in December, with a big rise in buying activity: Insider buying jumped to about 47 percent. 

Since then, as the markets recovered, insiders also cooled their buying activity. In April and continuing into the first week of May, insider buying averaged just about 20 percent, significantly below the historical average. 

The lesson is that insiders are advising caution about the recent run-up in stock prices. They seem to be focusing on the risks rather than opportunities at this time. 

Their actions tell us that they seem to find the market pricey at the current levels. Guessing the future course of the stock market is always a risky business. Even insiders are not always right. 

Nejat Seyhun is the Jerome B. & Eilene M. York professor of business administration and a professor of finance at the Ross School of Business at the University of Michigan.