I hadn't looked in awhile but thought about it today. Scott shows this chart every once in awhile on the Tuesday Webinar (highrockcapital.ca/current-edition-of-the-weekly-webinar.html).
The chart below shows the level of Margin Debt (orange) on the NYSE at US Dealers and the S&P 500 (white)(SPX).
Margin debt is basically the loans that a dealer provides to allow you to buy more stock to leverage up the stock positions in your portfolio. That is to say, if you only have $100,000 to invest, a dealer may lend you margin of 50% so you can now invest up to $150,000 in certain stocks. So you now have $150,000 invested and at work vs only $100,000 without the margin.
What the chart above shows is that Margin Debt is obviously at an all-time high at 54% ($540 of margin debt per $1,000 of equity value balances). As you can see, after the credit crisis, margin debt was at a low of around 17%. What you will also notice is that Margin Debt tracks extremely closely to the SPX.
The thing about leverage (provided here by margin debt) is that, it cuts both ways.
When the asset price (SPX in this case) rises, you a) make even more money than you would have if you only used your equity and no leverage and b) as your asset price rises, the equity in your account rises and the dealer will give you even more leverage (hence the tight correlation between margin and SPX). Self-fulfilling, isn't it?
But the other side of the sword is falling asset prices. If your equity value falls, the dealer will issue what is called a "margin call" and either you provide more capital to your account or...you sell some of your stocks to meet the margin call and that can lead to a general sell-off in the stock market as is seen in 2008/2009.
This leverage embedded in the market can create something similar to what is called "negative convexity" in the bond market. What this means is that, the more the SPX market goes up, the more you want/need/are able to buy more stocks but the more the market goes down, the more you must sell. Bottom line - margin debt creates more potential volatility in the market. .
With short term interest rates rising, margin debt costs will undoubtedly rise too.
Would you increase your level of margin debt borrowing if you knew the cost of that borrowing has risen recently and may rise even further in the near future? And with stocks, that you are leveraged to, are all-time highs? And with Tom, Dick and Harry all utilizing margin debt?
I am not so sure I would.