This Scary-Looking Number Is Nothing to Worry About
Big round numbers get attention...
It's exciting when these numbers are good – but scary when they're bad.
People put a lot of weight on milestones. Still, good or bad, you can't judge anything correctly without putting it into context. And that's exactly what we're doing today... with a scary-looking number that came out in recent months.
I'm talking about the amount of money folks have borrowed to buy stocks. This total hit a new all-time high this year... And it recently broke above $1 trillion for the first time in history.
At first, that sounds like a bad omen. If investors have borrowed $1 trillion to buy stocks, then this bull market must be a house of cards, right?
Not at all, as we'll explain. This borrowing is actually well below what we've typically seen over the past two decades. And that makes this a "scary" setup that you can safely ignore.
Margin Debt Hits an All-Time High
Borrowing money to buy stocks is called "buying on margin."
A brokerage might let you deposit $1,000 into your account, then borrow $1,000 more to buy $2,000 worth of stocks. You pay interest on the $1,000 you borrowed... But you get additional stock exposure.
The downside is that if your stocks fall in value, the broker will force you to either send more money or sell off part of your position at a loss.
That's the upside and downside of margin. It can amplify your gains in good times... but worsen your losses in bad times.
Again, margin can lead to forced selling when stocks fall. So if a massive amount of margin debt is floating around in the system, it weakens the overall market.
That's what makes the recent data from the Financial Industry Regulatory Authority ("FINRA") so spooky. It showed that margin debt hit a new all-time high in January... then topped $1 trillion for the first time ever in June. Take a look...
It's hard to look at this chart without getting worried. Margin debt has soared over time. And it has nearly doubled since the end of 2022 alone.
It's true, $1 trillion does seem like a lot of debt... But is it?
To answer this question, we need context. We have to see how margin debt compares with the market's value through time.
The chart below shows this comparison. It divides margin debt by total market value. That gives us a ratio, which is one way to see how much debt is in the market. Take a look...
This ratio tells us two important things...
First, today's level isn't high compared with history. Margin debt is about 1.6% of the total market value right now. That's below the long-term average of 1.9%. This extra context indicates that the scary "big round number" of $1 trillion isn't anything to worry about.
Second, 1.6% is an incredibly small amount compared with the whole. It's nothing. If all of that margin came out of the system at once, it likely wouldn't even mean a brutal crash. Heck, the ratio has been falling for the past decade... yet stocks have climbed higher and higher over that time.
All of this means the market is not some house of cards waiting to tumble.
The big round numbers can make good headlines. They can be exciting or scary. But you always need to put them into context. And once we do that, it's clear that this margin-debt breakout is a worry you can ignore.
Good investing,
Brett Eversole
Further Reading
"Most of investors' worst fears of the past decade haven't mattered much," Brett writes. That's because bull markets tend to climb a Wall of Worry. History shows that panic selling because of the latest market fears is a bad idea – and today is no different.
"Mainstream and social media believe America is spiraling out of control," Sean Michael Cummings says. Many investors are anxious about the market's future after the tragedies of recent weeks. But America's "forces of stability" have a more bullish outlook.
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