The Fat Pitch: Margin Debt Levels At Relative Highs Posted by Urban Carmel at 3:23 PM Friday, June 5, 2015
Summary: Margin debt levels are at all-time highs, on an absolute basis and as a percent of market capitalization. What does this imply?
High margin debt mostly tells us that investors are bullish on equities; there is no other reason investors would be using so much leverage to buy stock. A high proportion of bullish investors usually leads to slower future stock market appreciation as there is less fuel to drive prices higher. Beyond that, it is is difficult to make definitive conclusions on what high margin debt implies for equities looking ahead. Could margin debt rise further? Yes, it could continue to rise at the same rate as market capitalization and, objectively, not be out of proportion. But a dramatic increase, like in 2012-13, that turbo-charged the equity rally, is probably not likely. Could the stock market fall 10% or more? Yes, highs in margin debt have coincided with near term highs in the market. There's no need for margin debt to fall ahead of stock prices. ***
The "margin debt" levels for the NYSE have received a lot of attention this week. In April, margin debt increased by 6.5% from March to $507b. This is a new all-time high in both nominal and inflation-adjusted (real) terms.
What is margin debt? Customers can borrow (cash) against the assets (stocks) in their brokerage account. Most often, this new cash is then used to buy more stock. High levels of margin debt means that investors are leveraged long, a sign that they are bullish equities.
So it should be no surprise that margin debt and equity prices move up and down together. As equity prices rise, customers have greater assets to borrow against, and using borrowed cash (leverage) to buy more stocks makes equity prices rise faster. That is what has happened in the past three bull markets (chart from Doug Short).
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