02/21/24 08:50 AM EST

Inflation Adjustments Change Narrative on Margin Debt

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.

Margin leverage represents the funds borrowed by investors from their brokerage through a margin account. This financial strategy enhances potential returns, as it allows investors to command a larger position in a stock than their capital alone would permit, thereby intensifying profits (and losses).

The latest figures from FINRA show that margin debt has continued its growth trajectory for the third consecutive month, reaching $701.98 billion. When observed on a month-over-month basis, the debt has increased slightly by 0.2% and significantly by 9.5% from the previous year. Yet, when we adjust for inflation, the growth narrative adjusts, showing a 0.4% month-over-month decrease but a 6.2% annual increase.

Although this data is typically two weeks old upon release, historical patterns suggest margin debt levels can provide foresight into market movements. For instance, the substantial rise in leverage in late 1999 culminated in March 2000, aligning with an interim daily peak of the S&P 500, even though the index reached its peak monthly close later in August. A similar pattern emerged in 2006, with the peak in leverage occurring in July 2007, a few months before the market peak. A significant trough was noted in February 2009, coinciding with the market bottom, followed by a notable uptrend. More recently, a surge post-COVID peaked in October 2021, preceding the market's all-time high by two months. Margin debt is not cratering but is increasing at a much slower rate and decreasing MoM when adjusted for inflation.

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