Margin debt is money that individuals and institutions borrow against their stock holdings in order to buy more stocks. Margin debt works great in roaring bull markets and opposite when the bear arrives. There is a clear link between the use of margin debt and the stock market. When margin debt spikes, a stock market decline follows.
The margin debt has spiked dramatically since the bottom of the COVID-19-related stock market crash in March 2020. There have been two smaller spikes in margin debt that happened in 1999 and 2007. Most of us remember the brutal bear market that followed: The S&P 500 dropped 49.1% and 56.8%.
Now here we are again: Margin debt has again spiked, but in a more extreme fashion. This is definitely a time to be cautious as an investor. There are just too many warning signs that the stock market is getting into dangerous territory that should not be ignored: high margin debt, speculative excesses in meme stocks and market valuations near historic highs.
Prepare for some unpleasantness in the short term.
Sven Franssen