Tuesday, June 2, 2015

Rallying on Borrowed Hope: NYSE Margin Debt at Record High

Credits: Doug Short
Doug Short (May 29, 2015) - The NYSE margin debt data is about a month old when it is published. The latest debt level is up 6.5% month-over-month and at a record high. Real (inflation-adjusted) debt rose 6.24% month-over-month and also at a record high [...] What is "margin debt"? It's the amount of money stock investors have collectively borrowed via traditional margin accounts to fund stock purchases. In a bull market, the growth of margin debt serves as a turbocharger that helps drive stock prices higher. Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. 

Credits: Doug Short
But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market. After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August, 2010 Jackson Hole speech. The appetite for margin instantly returned, and the Fed periodically increased the easing. Now that QE over, it will be particularly interesting to watch debt levels in the months ahead.