Caution: Investors Increasing Leverage In Hot Market

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.

The chart presents the relationship between margin debt and the NYSE Index over the years. Margin debt refers to the amount of money borrowed from brokers by investors to purchase securities, leveraging their investments. As the chart shows, margin debt has generally followed an upward trajectory, moving in tandem with the NYSE Index.

It's notable that spikes in margin debt levels have often preceded market corrections or downturns. The sharp rises in margin debt leading up to the 2000 dotcom bust and the 2008 financial crisis were followed by significant market declines, as indicated by the corresponding drops in the NYSE Index.

Looking at the recent data points, margin debt reached $661 billion in November 2023, followed by $700 billion in December 2023, $701 billion in January 2024, and a notable increase to $742 billion in February 2024. This accelerating use of margin debt signals increasing investor leverage. Margin debt is not at the extreme levels we saw before the GFC and Covid-related crash; however, it is steadily growing and proving supportive of the market despite much higher than historical costs of leverage. Alongside growing leverage from options markets, reflected in the general downward trend in the use of margin debt, it suggests that market participants are fully involved at this point -- an interpretation matched by reported equity allocations as discussed in prior notes.

Learn more about the Market Situation Report written by Tier 1 Alpha.