It’s another new record for the stock market! The S&P 500 traded as high as 3824 yesterday – its highest level ever. And, investors are celebrating the event.
But, not every all-time high is a good thing. The record I’m writing about today is somewhat less celebratory.
And, if history is any sort of a guide, then there’s another reason to be a bit cautious here.
Let me explain…
Last month, brokerage account margin debt surged to an all-time high of $722 billion.
Margin debt is money that investors have borrowed to put into the stock market. So, to put it another way… last month, investors borrowed a record amount of money to put into the stock market at record-high prices.
That’s not good news.
You see, there’s a strong correlation between record-high margin debt occurring right before a peak in the stock market – especially following several years of higher stock prices.
For example, in March 2000, margin debt reached a record high of $278 billion. That was the same month the S&P 500 peaked at 1525. One year later, the index was trading at 1100 – down 28% from its all-time high.
Margin debt peaked again in June 2007 when it reached $381 billion. Sixteen months later, the S&P 500 had fallen by 50%.
The ability to borrow money helps to push stock prices higher as investors buy stocks at ever-rising prices. It’s tempting to borrow money to invest in the stock market. After all, if you can borrow money for 2%, invest it, and make 10% or more, then you look like a genius.
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The problem, of course, is when you borrow money at 2%, and then lose the funds.
Leverage is a double-edged sword. And, the stock market isn’t known for making the majority of investors look smart. So, when everybody’s borrowing money with the hopes of levering up their returns, it’s usually a good reason to be a bit cautious.
Margin debt rose to a record $722 billion last month. That’s 10% higher than where it was the month before… And, that’s one of the largest monthly surges in margin debt – ever. All of that money has helped push stocks to record prices.
But, the stock market making a new high on a record amount of borrowed money may not be the sort of good news many investors think it is.
Best regards and good trading,
Jeff Clark
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