Margin
Debt
All Time High!
The additional leverage – borrowed money flowing into the stock market – creates buying pressure and drives stock prices higher. Leverage is the great accelerator on the way up, but it’s also the great accelerator on the way down. Multi-month surges in margin debt, jumping from new high to new high, indicate excessive speculation and risk-taking and have invariably led to sharp selloffs:
The annotations in the chart:
March 2000 was the beginning of the Dotcom Bust, during which the S&P 500 fell by 50% and the Nasdaq by 78%.
July 2007 was just before the stock market started tuning into the beginning of the Financial Crisis, during which the S&P 500 fell by 56%.
May 2018 was followed by a 20% decline in the S&P 500 by late 2018.
October 2021 led to a 25% decline of the S&P 500.
March 2020 was the Covid crash, caused by investors’ reaction to the pandemic. At the time, leverage was relatively low and had been declining, which was a good thing and protected the market. If leverage had been spiking for five months from record to record before the pandemic, the sell-off would likely have been much more severe.
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