by Doug Short
The New York Stock Exchange publishes end-of-month data for margin debt on the NYXdata website, where we can also find historical data back to 1959. 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 the current dollar using the Consumer Price Index as the deflator. I picked 1995 as an arbitrary 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 its real all-time high. A similar surge began in 2006, peaking in July, 2007, three months before the market peak.
The next chart shows the percentage growth of the two data series from the same 1995 starting date, again based on real (inflation-adjusted) data. Margin debt grew at a rate comparable to the market from 1995 to late summer of 2000 before soaring into the stratosphere. The two synchronized in their rate of contraction in early 2001. But with recovery after the Tech Crash, margin debt gradually returned to a growth rate closer to its former self in the second half of the 1990s rather than the more restrained real growth of the S&P 500. But by September of 2006, margin again went ballistic. It finally peaked in the summer of 2007, about three months before the market.
After the market low of 2009, margin debt again went on a tear until the contraction in late spring of 2010. The summer doldrums promptly ended when Chairman Bernanke hinted of more quantitative easing in his August 27th Jackson Hole speech. The appetite for margin instantly returned.
Unfortunately, the NYSE margin debt data is a few weeks old when it is published. In nominal terms, margin debt at the end of April, the latest available data, was at a level comparable to February 2008, just weeks before the Fed arranged the Bear Stearns buyout by JP Morgan Chase. The May margin numbers will almost certainly reflect the recent market correction. What remains to be seen is whether a continuation of the correction will occasion a feedback loop — an increase in margin calls that would, in turn, trigger more selling.
Doug Short is the founder of dshort.com, now more than five years old, which specializes in detailed graphical analysis of markets and economic factors. He has a Ph.D. from Duke, has been a full professor at North Carolina State University and has held positions with IBM and GlaxoSmithKline . Stay in touch:
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