As we get ready to head into 2021, look at what is hitting record highs.
Margin debt, and other leverage, hits record high
December 29 (King World News) – Here is a portion of a special report put out by Jason Goepfert at SentimenTrader: At various points over the past several years, the topic of margin debt has come up as a sign of investor excess. Every time we’ve looked at it, though, it hasn’t suggested a reason for concern. Debt as a percentage of stock market capitalization has remained low, and more importantly, the rate of growth of that debt had been about in line with that of stocks.
With the latest release of the margin debt figures, there are some anecdotal concerns. As the Wall Street Journal points out, the gains in stocks, and highflyers like Tesla, in particular, have emboldened a new generation of investors testing the limits of what leverage can do (emphasis added)…
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She says she doesn’t think she will see another year of gains quite like 2020 soon. But she has no plans to sell any of her Tesla stock either and is open to the idea of borrowing more against her portfolio.
“This is what wealthy people do,” Ms. Roberts said.
Bears will likely start to grumble about this once again because debt jumped again in November to a record high. Investors have over $722 billion in loans borrowed against the value of their stock holdings.
Like it has been in recent years, though, debt is still very low relative to the value of the overall stock market. When we’ve looked at it this way in the past, it hasn’t been an effective measure, especially at peaks and it has become even less useful over the past 15 years or so.
Zooming in on the past 20 or so years, we can see how it lines up against stocks, which is not encouraging.
Over the past 5 years, all the “sell now!” statements from those bearish on the market, using margin debt as an excuse, haven’t had much empirical support. Debt levels just weren’t that high relative to stocks’ value (and still aren’t) and the rate of growth was tame. That latter point is starting to shift, and there is more of an argument now that it’s starting to become a warning sign. A minor one, still, but a warning nonetheless. This is a good example of why Jason Goepfert is recognized as doing some of the best work in the world. To sign up for internationally acclaimed work that Goepfert produces at SentimenTrader CLICK HERE.
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