You may have run across an article or two stating that NYSE margin debt recently reached an all-time high (ATH). Some of the articles equate a new high in margin debt with a new high in speculation, which must mean the end is near and we should all stock up on canned goods.
Margin Debt: An investor borrows money on "margin" in order to increase the amount of money they have to invest. They "borrow money on margin on buy stocks".
What Do The Facts Say About Margin and Stocks?
You could have seen similar “New All-Time Highs In Margin Debt Is A Red Flag For Stocks” headlines in February 1978, April 1983, and February 1993. Were those bearish warnings helpful? You can decide after reviewing a detailed look at new highs in margin debt and returns in the stock market.
1978 – A New All-Time High in Margin Debt
The chart below could have been used as “bearish” evidence in 1978 since margin debt hit levels never seen prior to that time.
1978 – What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
The “Bearish” Warnings Kept Coming
If we interpreted a new all-time high in margin debt as bearish, we would have had a ton of “bearish” ammunition over the next three years. Assume we are at point A or February 28, 1978. Below are the headlines we could have seen between point A and point B, which provides some context for 2015 headlines related to margin:
Margin Debt Hits New All Time High – February 1978 (point A) Margin Debt Hits New All Time High – March 1978 Margin Debt Hits New All Time High – April 1978 Margin Debt Hits New All Time High – May 1978 Margin Debt Hits New All Time High – June 1978 Margin Debt Hits New All Time High – July 1978 Margin Debt Hits New All Time High – August 1978 Margin Debt Hits New All Time High – September 1978 Margin Debt Hits New All Time High – September 1980 Margin Debt Hits New All Time High – October 1980 Margin Debt Hits New All Time High – November 1980 (point B)
How Did Stocks Perform Between Points A and B?
We have now reached point B or November 30, 1980. How did stocks do between point A and point B as margin debt posted 11 new all-time highs? The answer is extremely well. The S&P 500 closed at 87.04 on February 28, 1978 (point A). On November 30, 1980 (point B), the S&P 500 closed 140.52. Therefore, if we sold all our stocks when margin debt hit a new all-time high on February 28, 1978, we would have missed a 61.44% gain in the S&P 500 (see chart below). In summary, during a period where margin debt posted 11 new all-time highs, stocks gained over 61%.
1983 – A New All-Time High in Margin Debt
As shown in the chart below, we could have penned a “bearish” warning about a new all-time high in margin debt in April 1983.
1983 – What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
The “Bearish” Warnings Kept Coming
If we interpreted a new all-time high in margin debt as bearish, we would have had a ton of “bearish” ammunition over the next four years. Assume we are at point C or April 30, 1983. Below are the headlines we could have seen between point C and point D, which provides some context for 2015 headlines related to margin:
Margin Debt Hits New All Time High – April 1983 (point C) Margin Debt Hits New All Time High – May 1983 Margin Debt Hits New All Time High – June 1983 Margin Debt Hits New All Time High – July 1983 Margin Debt Hits New All Time High – August 1983 Margin Debt Hits New All Time High – September 1983 Margin Debt Hits New All Time High – October 1983 Margin Debt Hits New All Time High – November 1983 Margin Debt Hits New All Time High – December 1983 Margin Debt Hits New All Time High – January 1984 Margin Debt Hits New All Time High – July 1984 Margin Debt Hits New All Time High – March 1985 Margin Debt Hits New All Time High – April 1985 Margin Debt Hits New All Time High – May 1985 Margin Debt Hits New All Time High – June 1985 Margin Debt Hits New All Time High – August 1985 Margin Debt Hits New All Time High – October 1985 Margin Debt Hits New All Time High – November 1985 Margin Debt Hits New All Time High – December 1985 Margin Debt Hits New All Time High – March 1986 Margin Debt Hits New All Time High – April 1986 Margin Debt Hits New All Time High – May 1986 Margin Debt Hits New All Time High – June 1986 Margin Debt Hits New All Time High – July 1986 Margin Debt Hits New All Time High – August 1987 Margin Debt Hits New All Time High – September 1986 Margin Debt Hits New All Time High – October 1986 Margin Debt Hits New All Time High – November 1986 Margin Debt Hits New All Time High – March 1987 Margin Debt Hits New All Time High – April 1987 Margin Debt Hits New All Time High – July 1987 Margin Debt Hits New All Time High – August 1987 (point D)
How Did Stocks Perform Between Points C and D?
We have now reached point D or July 30, 1987. How did stocks do between point C and point D as margin debt posted 32 new all-time highs? The answer is extremely well. The S&P 500 closed at 164.43 on April 30, 1983 (point C). On July 30, 1987 (point D), the S&P 500 closed at 318.05. Therefore, if we sold all our stocks when margin debt hit a new all-time high on April 30, 1983, we would have missed a 93.43% gain in the S&P 500. In summary, during a period where margin debt posted 32 new all-time highs, stocks gained over 93%.
1993 – A New All-Time High in Margin Debt
Since the last cycle of new all-time highs in margin debt started ten years before February 1993, many investors forgot there is no stock market law that says new all-time highs in margin debt and stock prices cannot continue for several years. Therefore, if we were new to the markets, the chart below from February 1993 could have been used as “be careful” evidence for equity investors.
1993 – What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
Seven Years Of “Bearish” Warnings Followed
Assume we are at point E or February 28, 1993. Below are the headlines we could have seen between point E and point F, which provides some context for 2015 headlines related to margin:
Margin Debt Hits New All Time High – February 1993 (point E) Margin Debt Hits New All Time High – March 1993 Margin Debt Hits New All Time High – April 1993 Margin Debt Hits New All Time High – May 1993 Margin Debt Hits New All Time High – June 1993 Margin Debt Hits New All Time High – August 1993 Margin Debt Hits New All Time High –September 1993 Margin Debt Hits New All Time High –October 1993 Margin Debt Hits New All Time High – November 1993 Margin Debt Hits New All Time High – December 1993 Margin Debt Hits New All Time High – January 1994 Margin Debt Hits New All Time High – February 1994 Margin Debt Hits New All Time High – August 1994 Margin Debt Hits New All Time High – January 1995 Margin Debt Hits New All Time High – April 1995 Margin Debt Hits New All Time High – June 1995 Margin Debt Hits New All Time High – July 1995 Margin Debt Hits New All Time High – August 1995 Margin Debt Hits New All Time High – September 1995 Margin Debt Hits New All Time High – November 1995 Margin Debt Hits New All Time High – March 1996 Margin Debt Hits New All Time High – April 1996 Margin Debt Hits New All Time High – May 1996 Margin Debt Hits New All Time High – June 1996 Margin Debt Hits New All Time High – September 1996 Margin Debt Hits New All Time High – November 1996 Margin Debt Hits New All Time High – December 1996 Margin Debt Hits New All Time High – January 1997 Margin Debt Hits New All Time High – February 1997 Margin Debt Hits New All Time High – March 1997 Margin Debt Hits New All Time High – May 1997 Margin Debt Hits New All Time High – June 1997 Margin Debt Hits New All Time High – July 1997 Margin Debt Hits New All Time High – August 1997 Margin Debt Hits New All Time High – September 1997 Margin Debt Hits New All Time High – October 1997 Margin Debt Hits New All Time High – February 1998 Margin Debt Hits New All Time High – March 1998 Margin Debt Hits New All Time High – May 1998 Margin Debt Hits New All Time High – June 1998 Margin Debt Hits New All Time High – July 1998 Margin Debt Hits New All Time High – March 1999 Margin Debt Hits New All Time High – April 1999 Margin Debt Hits New All Time High – May 1999 Margin Debt Hits New All Time High – July 1999 Margin Debt Hits New All Time High – September 1999 Margin Debt Hits New All Time High – October 1999 Margin Debt Hits New All Time High – November 1999 Margin Debt Hits New All Time High – December 1999 Margin Debt Hits New All Time High – January 2000 Margin Debt Hits New All Time High – February 2000 Margin Debt Hits New All Time High – March 2000 (point F)
How Did Stocks Perform Between Points E and F?
We have now reached point F or March 30, 2000. How did stocks do between point E and point F as margin debt posted 52 new all-time highs? The answer is extremely well. The S&P 500 closed at 443.38 on February 28, 1993 (point E). On March 30, 2000 (point F), the S&P 500 closed at 1487.92. Therefore, if we sold all our stocks when margin debt hit a new all-time high on February 28, 1993 we would have missed a 235.59% gain in the S&P 500. In summary, during a period where margin debt posted 52 new all-time highs, stocks gained over 235%.
Moral of the Story
This article examines one question and one question only:
Is a new all-time high in margin debt, viewed in isolation, a reason to be concerned about stocks?
The answer is a definitive “no”. In fact, you can make an argument that a new all-time high in margin debt leans bullish rather than bearish. How can we say that? In the examples above, we listed 95 new all-time highs in margin debt. Of those 95, only 3 came near a significant or long-lasting peak in stocks. Said another way 97% of the new all-time highs in margin debt shown above were followed by gains in stocks; only 3% proved to be accurate bearish warnings.
2015: Bigger Picture Aligns With Margin
As we noted in this recent video, which compares 2015 to historical transitions to a bear market, the present day evidence is not screaming “a bear is right around the corner”. As always, we will take it day-by-day and remain flexible and open-minded. Given the data we have in hand, including margin debt, our market model is still calling for an equity-heavy investment allocation.
