CEOs and insiders are starting to sell their own stock, and that’s never a good look. Insider selling has topped $10 billion a month for the past five months; rates that haven’t been met since the last recession.
But what does it really mean when CEOs begin to sell? There are many reasons why a CEO could sell a stock, and not all of them are bad for the business.
A Lack of Confidence
When CEOs start selling their own stock, the initial conclusions is clear. The CEO is no longer confident in his or her business. While there are other mitigating circumstances, most CEOs aren’t going to sell their own stock if they have reason to believe that their stock is about to grow in leaps and bounds.
But when there’s a mass sell off event, it becomes a little less clear. When many CEOs are selling parts of their company, it becomes more of an economic event. CEOs may be trying to mitigate their own risk. CEOs themselves may be panicked and may be worried about a recession, or they may be establishing some level of liquidity due to their other, failing investments.
Thus, a mass selling of stock says more about the current market and economy than it does about any individual company. The individual companies may be doing just fine, but it may be the economy as a whole that should be a concern. Particularly now, many people are panicking due to the trade war, tariffs, Brexit, and other circumstances — situations which could be potentially devastating on a global scale, but in which the damage is currently unknown.
Individual Instances of Insider Selling
This covers the current mass sell off. But what about when a CEO suddenly sells their own stock outside of any current trends? While this is often considered to be a bad sign for a company, CEOs are still people. There are personal reasons CEOs might need to liquidate, and investors should be cautious about drawing conclusions from any individual sale. Insiders may have decided to reevaluate their portfolio, invest in a different company, or start a new company altogether.
That being said, there’s a reason why people do track insider selling. Insider selling, at very least, tells people that the company isn’t likely to be performing fantastically in the future. While the company may not exactly be struggling, someone on the inside has performed a cost-benefit analysis and decided that they are better off selling immediately than waiting even another day.
How Investors Should React
Stock prices are currently being driven down across the board, and the market is quite volatile. Most investors shouldn’t change their investment strategies now, for that reason. But a lack of CEO confidence during a down market can be a way to pick up affordable stock. Many stocks dip when insiders start selling off, even when insiders are selling off en masse.
But it should be noted that CEOs, while in business, don’t necessarily know any more about the market than the average investor. They’re simply selling stock as suits them. Due to the changes in business regulations, massive amounts of buybacks occurred, and this could easily impact the rate of stock sales today. CEOs are often doing whatever is most profitable to them, rather than acting on any sort of inside knowledge.
So, while a CEO sell off likely means that a company isn’t going to start doing better by leaps and bounds, it’s not necessarily indicative of the performance of the stock itself. It is more likely to be indicative of the temperature of the market as a whole.
As the economy worsens and CEOs find themselves craving liquidity, they will likely continue to sell off their own stocks. Insiders may need to move their investments around, and may cut their worst performing investments. It’s another signal that a recession might be coming up, but it’s far from a conclusive one.