Margin debt for U.S. markets has witnessed 54-year all-time high of $401 billion in September 2013, signifying fragility of the underlying basis.
Lars Slomka and the Deutsche Bank market research team feel even a less severe sell-off in equities could trigger a mass pullout if investors are forced to sell immediately to pay off their loans.
Margin debt surpassed recent peak
Margin debt is the money borrowed against securities in brokerage accounts. Recently, in the United States, margin debt had risen to its highest level ever, at $384 billion, surpassing the previous peak of $381 billion set in July 2007. However, margin debt as a proportion of GDP was not quite yet at the peak set in 2007, but it has exceeded 2.25% only twice previously in the last 50 years – 2000 and 2007.
Investors’ credit balance dwindling
Borrowing to execute securities trades has not waned much at all in recent months, with September 2013 witnessing margin debt of $401 billion. Deutsche analysts point out that correspondingly, total investors’ net worth touched a record low since 2003 at $110 billion.
The following graph illustrates the galloping negative investors’ credit balances:
Falling monthly change doesn’t sound alarm bell
Despite the monthly change in margin debt levels remaining below the 10% mark, Deutsche analysts believe the current situation reveals that investors have rarely been more leveraged than today. The monthly change in margin debt is at a critical level observed around the previous tech bubble peak in 1999/2000 and the financial crisis peak of 2007/2008.
The following graph highlights the month-on-month change in NYSE margin debt:
However, Lars Slomka and the Deutsche Bank market research team state that such a critical level doesn’t necessarily mean a peak in equities is just around the corner. However, they do point out this could signify that the underlying basis on which prices trade remain fragile, highlighting that even a less severe sell-off in equities could trigger a mass pullout in case investors are forced to sell immediately to pay off their loans.
As the overall margin debt level and the recent risk-on trade post the political deadlock in the U.S. has pushed the S&P 500 (INDEXSP:.INX) to a new high at 1756, Deutsche analysts feel cautiousness remains the imperative of the hour.
Deutsche Bank’s recent report also highlights the record inflows witnessed by the Western Europe equity funds besides inflow rebound experienced by emerging market equities. Further, by paying closer attention to the respectable YTD flows into U.S. equity funds, the analysts observe that small-cap, value and sector are the themes being played.