With everyone from DoubleLine Capital’s Jeffrey Gundlach to inverted yield curve disciples now forecasting a recession, it must be time to join the crowd and sell stocks, right?
Actually, this is exactly the wrong thing to do right now.
So say the “forecasters” with the best view on the economy: corporate insiders.
In the 5%-7% decline in the S&P 500 SPX, +1.49% , Dow Jones Industrial Average DJIA, +1.51% and Nasdaq Composite COMP, +2.02% since I suggested it was time for caution on stocks, insiders have stepped up to buy a big way.
More importantly, to me, they’ve put a decided emphasis on economically sensitive names. I recently told subscribers of my stock letter Brush Up on Stocks to get more bullish on stocks because of robust insider buying in cyclical sectors like tech, banks, industrials, chemicals, airlines, autos, hotels, energy, mining, and brokerage and investment companies.
Insiders would definitely not be doing this if — like Gundlach — they saw a recession on the way. Instead, they’d be on a buyer’s strike, or at best they’d favor utilities or consumer non-discretionary companies. But that’s not what we see at all.
Some notable examples of high-profile, economically-sensitive names where insiders are buying in large amounts include: JPMorgan Chase JPM, +1.63%, where a director just put $2 million into the bank’s stock; Ford Motor F, +0.65%, where Chairman William Clay Ford bought $7.9 million worth of stock; Chevron CVX, +0.35%, where a director bought a half million dollars’ worth; Dow DOW, +3.04%, where a director put $1.3 million into the stock; Marriott Vacations Worldwide VAC, +2.36%, where CEO Stephen Weisz bought $335,000 of stock; and eBay EBAY, +2.92%, where a director bought nearly a quarter million worth.
If the economy were about to tank, these insiders would not be buying these economically sensitive names in such large amounts. And this isn’t just exercising stock options, which doesn’t appear as insider buys in reporting and is excluded from this analysis.
Here’s another factor that reinforces the bullish take among insiders. Several of the sentiment indicators I track have now turned decidedly negative. This is a bullish sign from the contrarian point of view. Last week, two Cboe Options Exchange put/call ratios turned bearish (spike in bearish put buying vs. decline in bullish call buying), and the American Association of Individual Investors survey turned negative.
A basic rule I follow when making market calls in my stock letter is that when insiders are bullish and the crowd is bearish, it’s time to buy stocks. None of this means we will see the bottom in the selloff today or tomorrow. No one can make calls that precise. But insiders are telling us two things. We’re getting closer to the bottom, and worries about the economy are exaggerated.
A pipeline of stimulus
Before we get to more stocks that look attractive because of bullish insider buying, why might the economy be on track for sustained growth if analysts and investors are so bleak?
While many commentators focus on the negatives of trade wars and the inverted yield curve, they’re overlooking the pipeline of economic stimulus in the works, says Leuthold Group chief investment strategist James Paulsen.
He cites the decline in the entire yield curve in the U.S. and negative interest rates abroad. For example, the U.S. yield curve has fallen by about a percentage point across the board in the past six to nine months. In Germany, 10-year bonds now carry a negative yield of about 60 basis points, a 1.2 percentage point shift since October. Both make money cheaper, which encourages borrowing to stimulate the economy.
Read: A Danish bank is offering mortgages with negative interest rates — why you shouldn’t wish for that to happen in the U.S.
What’s more, money supply growth has increased since late 2018. Fiscal stimulus (deficit spending) has increased in the U.S. since the start of 2018. And corporate costs are more profit friendly because commodity costs are down and wage inflation has stopped accelerating.
It’s different this time
But what about that pesky inverted yield curve? Paulsen agrees this is a troubling sign since it has such a good record of forecasting recessions. But another indicator has an even better record: fiscal tightening, and it’s not completely on board with the yield-curve forecast. Since 1950 we’ve had 10 recessions and seven of them were preceded by an inverted yield curve. But all 10 were preceded by fiscal tightening — which we do not see at the moment, says Paulsen.
There are other reasons to think “it’s different this time” when it comes to the yield curve. Those are admittedly four of the most dangerous words in investing. But the fact is, the long end of the yield curve is distorted (pushed down to create an inversion) by widespread long-bond ownership among 1) central banks looking to lower rates to boost growth (quantitative easing), and 2) foreigners looking for alternatives to low or negative yields where they live.
Now here’s a look at some of the biggest insider buys in economically-sensitive names and sectors since the start of August as stocks sold off.
Consumers get hit hard by recessions, so they cut spending dramatically. This hurts consumer-oriented companies. But insiders at many names in this group must not believe this scenario given their recent purchases.
Besides Marriott Vacations Worldwide, there’s been meaningful buying at Mastercard MA, +0.42%, Visa V, +0.31%, American Airlines AAL, +1.50%, Wyndham Destinations WYND, +2.36% , Energizer ENR, +2.21% and MHK Mohawk Industries MHK, +3.26%, which sells materials used in home construction and remodeling.
Tech companies get killed in recessions, since they’re among the most cyclical businesses. So why the recent insider buying in this group, which rarely sees any insider buying? Probably because recession forecasts are off target.
These tech companies, among others, recently saw meaningful insider buying: Twilio TWLO, +1.16%, Microstrategy MSTR, -0.15% and Agilysys AGYS, +1.17%.
Consumers pull back on big-ticket purchases in recessions. So why do we see big insider buying at Ford, CARS Cars.com CARS, +2.92% and the parts maker Tenneco TEN, +4.20%, among others? Maybe because a recession is not at hand.
In recessions, dud loans stack up, and new loans are scarce. A flat or inverted yield curve hurts margins. And yet insiders at over a dozen banks have been buying shares, most notably at JPMorgan, Prosperity Bancshares PB, +1.67%, Pinnacle Financial Partners PNFP, +2.45%, Century Bancorp CNBKA, -0.16%, Cadence CADE, +3.33% and Greenhill GHL, +2.07%.
If global growth were about to tank, energy demand would plummet and so would energy stocks. These stocks actually have fallen a lot. But energy insiders say the selling is overdone.
Besides the big buying at Chevron, energy insiders have been purchasing lots of stock at Occidental Petroleum OXY, -1.58%, Concho Resources CXO, +1.47%, Matador Resources MTDR, +2.07%, WMB Williams Companies WMB, +0.59% and MPLX MPLX, +0.48% plus at least a half dozen other names.
Chemicals, mining and industrial companies are highly sensitive to economic trends. So if a recession were around the corner, insiders would probably not be buying significant amounts of stock at: L3Harris Technologies LHX, +0.54%, Chemours CC, +2.68%, Olin OLN, +2.19%, Arconic ARNC, +0.71% and Cleveland-Cliffs CLF, +3.67% .
And yet, that’s exactly what we see.
At the time of publication, Michael Brush had no positions in any stocks mentioned in this column. Brush has suggested JPM, F, VAC, MHK, CNBKA, GHL, OXY, CXO, MTDR, and WMB in his stock newsletter Brush Up on Stocks. Brush is a Manhattan-based financial writer who has covered business for the New York Times and The Economist Group, and he attended Columbia Business School in the Knight-Bagehot program.