Geopolitical unrest is driving up oil prices, while insider trading is sending negative signals.

Chart of the Week

The main reason why the stock market declined last week was geopolitical unrest in the Middle East. After Israel attacked the Iranian embassy in Damascus and killed two senior generals of the Revolutionary Guard, Iran announced retaliatory action. Due to the high level of uncertainty over how Iran would respond, stock markets came under pressure.

With Iran’s direct attack on Israel, a taboo was broken. Until now, Iran had only responded through proxy groups and never directly itself. However, the attack did not cause major damage. The big question now is whether Israel will also directly attack Iran.

Why this matters.

As can be seen on the map above, Iran does not share a direct border with Israel. Around 2,000 kilometers separate the two countries. Both sides have only a limited number of weapons systems capable of covering this distance. That is why Iran operates through proxy groups, which it heavily supports with funding and weapons. These include Hamas, Hezbollah, and the Houthis.

With its allies, Iran has the ability to block or severely disrupt the trade route through the Suez Canal, or force Israel into a multi-front war.

The phrase “the stock market falls due to geopolitical unrest” is often said quickly. But why, exactly? It may sound somewhat cold-hearted, but a war in Gaza is unlikely to directly affect a global company like Coca-Cola or Microsoft. Nevertheless, both stocks declined last week.

The reason why stock markets around the world react is the impact on oil prices — the lifeblood of the global economy.

The chart shows oil prices since 2000. Crises have repeatedly triggered strong movements in oil prices. The current crisis is now causing the price to break upward out of the declining price channel (highlighted in green).

This could lead to higher inflation worldwide and significantly slow the global economy. Interest rate cuts in the United States and Europe would then likely be off the table. A recession in the U.S. could also be a possible consequence. That, in turn, would have a major impact on the elections in November in the United States. No U.S. president has ever been re-elected while the U.S. economy was in a recession. Biden’s fate as U.S. president is therefore closely tied to the current crisis in the Middle East.

The chart shows the 2024 GDP growth forecast for various countries and regions. The outlook for the United States currently remains very strong. In all other countries and regions, slower growth is expected (though growth is still expected overall).

A strong rise in oil prices could undermine this positive outlook. A lot is therefore at stake at the moment. This nervousness is currently leading to increased volatility in the stock markets.

Insider trading is sending negative signals.

Directors, senior executives, and major shareholders of a publicly listed company (holding 5% or more of a company’s shares) are subject to a range of reporting obligations and trading restrictions regarding their ownership and transactions involving the company’s securities. Compliance with these regulations requires strict procedures for both the company and its insiders.

One of the rules is that such insiders must report their transactions. These are collected and published in a database.

Investors can draw important conclusions from this data:

Insider Selling: A weak signal. Large company owners, such as Elon Musk, often receive relatively modest salaries and may therefore need to sell shares to finance major purchases (such as a house) or pay tax bills.

The chart shows that the stock market often declines before Tax Day — the day when all Americans are required to pay their taxes. This is often linked to share sales by “insiders.”

Insider Buying: This is a very strong signal. Insiders often have a disproportionately large share of their wealth invested in their own company’s stock — sometimes as much as 50–90% of their total assets. To diversify, they would generally be expected to reduce their holdings. Therefore, when such insiders buy additional shares, it is a very strong signal to other investors to do the same. They believe their stock is undervalued.

The following chart shows the number of insider purchases minus the number of insider sales:

This index has fallen to a historic low over the past 10 years. This is due to relatively strong selling activity, but also because hardly any insiders are buying at the moment. Many company executives seem to believe that their stocks are already richly valued and do not see much upside potential for “their” shares in the coming weeks and months.

After the strong rise in stock markets since December 2023, this is understandable. It may therefore be a good time to maintain a relatively high cash position in the portfolio in order to take advantage of lower prices during market pullbacks.