Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.
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BONUS CHART We are reviving a bonus chart we haven't used in a while. Leveraged financing, commonly referred to as margin debt, explains the mechanism where investors borrow funds from their brokers to purchase securities, using their existing or recently acquired equities as collateral for the loan. A substantial buildup of margin debt can frequently trigger rapid market declines as falling stock prices prompt margin calls, sparking further selling. |
FINRA Margin Debt is currently recorded at $681.23 billion, reflecting an increase from last month's figure of $644.17 billion. However, this is a slight decrease from $683.45 billion a year ago and well off the nearly $1 trillion level from 2021. The reduced level of margin utilization likely reflects a combination of a much higher borrowing cost (margin debt typically references the secured overnight funds rate [SOFR]) and modestly lower investor confidence, a situation reminiscent of the bear market rallies experienced in 2000 and 2008. While surveys of investor risk sentiment and some aspects of price action suggest "the bull is back", investors have not yet begun to aggressively borrow to speculate.
This can be seen in the ongoing interplay between the NYSE index and the total level of margin debt, which demonstrates a significant divergence. This ongoing gap could indicate that investors are navigating cautiously amidst these unpredictable market conditions, apprehensive about over-extending their portfolios. Margin debt is up 11% in 2023, while SPX is up 18%; similar divergences were observed in 2002 and 2019, both of which preceded considerable market downturns.
