Stock Market Leverage Spikes. Sparks Already Flew. Brokerage Regulator “Concerned.” But Hey, Nothing’s Going to Happen.
Resting Happily on Smoldering Powder Keg.
There is nothing like a big shot of leverage to fire up the stock market. And that’s what the market got in 2017, when the S&P 500 surged 26%, and in January 2018, when the index soared another 7.5% through January 26 – until suddenly something happened.
One measure of leverage in the stock market is margin debt – the amount individual and institutional investors borrow from their brokers against their portfolios – which surged $22.9 billion in January to a new record of $665.7 billion, according to FINRA (Financial Industry Regulatory Authority), which regulates member brokerage firms and exchange markets, and which has taken over margin-debt reporting from the NYSE.
For the 12-month period through January, margin debt soared $112.2 billion, among the largest 12-month gains in the history of the data series, behind only the 12-month periods ending in:
- December 2013 ($123 billion)
- July 2007 ($160 billion)
- March 2000 ($133.7 billion)
- November 1997 ($132 billion).
But it’s not just the recent surge; it’s the length of the surge. With only a few noticeable down periods, margin debt has soared for nine years in a row and now exceeds the prior peak of July 2007 ($416 billion) by 60%.
By comparison, over the same period, nominal GDP (not adjusted for inflation) has grown 32%, and the Consumer Price Index has grown 20%. In other words, margin debt has ballooned twice as fast from peak to peak as GDP and three times as fast as the Consumer Price Index.
The chart below shows margin debt based on the FINRA data, which includes margin debt from its own member firms and from NYSE Member firms, and is therefore more complete and larger than the NYSE data was. For example, NYSE margin debt in November 2017, the last month available, was $580.9 billion while FINRA’s data for November showed margin debt of $627.4 billion.
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