Doug Short: The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. Let’s examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.
The first chart shows the two series in real terms — adjusted for inflation to today’s dollar using the Consumer Price Index as the deflator. At 1995 start date is we were well into the Boomer Bull Market that began in 1982 and approaching the start of the Tech Bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit its all-time daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July 2007, three months before the market peak.
Debt hit a trough in February 2009, a month before the March market bottom. It then began another major cycle of increase.
The Latest Margin Data
The NYSE margin debt data is about a month old when it is published. The latest debt level is down 1.6% month-over-month from April’s record high. Real (inflation-adjusted) debt declined 2.08% month-over-month.
At the suggestion of Mark Schofield, Managing Director at Strategic Value Capital Management, LLC, we’ve created the same chart with margin debt inverted so that we see the relationship between the two as a divergence.
The next chart shows the percentage growth of the two data series from the same 1995 starting date, again based on real (inflation-adjusted) data. We’ve added markers to show the precise monthly values and added callouts to show the month. 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. 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.
NYSE Investor Credit
Lance Roberts of STA Wealth Management analyzes margin debt in the larger context that includes free cash accounts and credit balances in margin accounts. Essentially, he calculates the Credit Balance as the sum of Free Credit Cash Accounts and Credit Balances in Margin Accounts minus Margin Debt.