Margin Debt Down 2.9% in August; First Decline Since April
Margin debt is the amount of money an investor borrows from their broker via a margin account. Trading with a margin debt can magnify gains because an investor can benefit from the upside of any stock without having to invest 100%, resulting in greater profit. With that being said, trading with margin debt can also exacerbate losses because if a stock's value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement.
The Latest Margin Data
FINRA has released new data for margin debt, now available through August. The latest debt level fell for the first tine since April to $689.19 billion. Margin debt is down 2.9% month-over-month (MoM) and up 0.2% year-over-year (YoY). However, after adjusting for inflation, debt level is down 3.3% MoM and down 3.3% YoY. Let's examine the numbers and study the relationship between margin debt and the market, using the S&P 500 as the surrogate for the latter.
The first chart shows the two series in real terms — adjusted for inflation to today's dollar using the consumer price index (CPI) as the deflator. At the 1997 start date, we were well into the boomer bull market that began in 1982 and approaching the start of the tech bubble that shaped investor sentiment during the second half of the decade. The astonishing surge in leverage in late 1999 peaked in March 2000, the same month that the S&P 500 hit an interim daily high, although the highest monthly close for that year was five months later in August. A similar surge began in 2006, peaking in July 2007, three months before the market peak. Debt hit a trough in February 2009, the same month the market hit a bottom. It then began another major cycle of increases. Most recently, we saw a similar surge after the COVID-pandemic, peaking in October 2021, two months before the market's all-time high.