Leverage, the great accelerator on the way up and on the way down.
Margin debt is the embodiment of stock market risk. As reported by the New York Stock Exchange today, it jumped 3.5%, or $19.5 billion, in November from October, to a new record of $580.9 billion. After having jumped from one record to the next, it is now up 16% from a year ago.
Even on an inflation-adjusted basis, the surge in margin debt has been breath-taking: The chart by Advisor Perspectives compares margin debt (red line) and the S&P 500 index (blue line), both adjusted for inflation (in today’s dollars). Note how margin debt spiked into March 2000, the month when the dotcom crash began, how it spiked into July 2007, three months before the Financial-Crisis crash began, and how it bottomed out in February 2009, a month before the great stock market rally began:
This post was published at Wolf Street on Dec 27, 2017.