In an ominous sign for markets, margin debt among investors increased by 32% to $1.3 trillion between May and September of this year.
Elevate Your Investing Strategy:
- Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.
Margin debt is essentially a loan taken out by an investor from a broker to buy stocks. The only times margin debt has increased at a faster pace over a five month period was during the Covid-19 pandemic in 2020, when it gained 35%, and in early 2000 right before the dotcom bubble burst.
Analysts say that margin debt is a sign of excessive risk in the market. Margin debt tends to rise sharply during overheated bull runs when investors chase momentum. Investors buy stocks at high prices using debt with hopes that those stocks will rise even higher.
Margin Call
The risk with taking on margin debt is that a stock price drops, and the broker asks the client to deposit more money into their account or calls in the loan entirely, known as a “margin call.” If the investor can’t deposit more money or cover the loan with cash, the broker can force a sale of the investor’s stocks to help cover the loan.
Margin debt in the U.S. grew by nearly 40% year-over-year at the end of September this year. In the past when margin debt levels have grown 40% or more year-over-year, it has been followed by a sharp downturn in stock prices and trouble for many investors who have been forced to sell their holdings.
Analysts warn that the current margin debt looks to be riskier than during the Covid-19 pandemic in 2020 as we’re now seeing declining banking reserves and the U.S. Federal Reserve isn’t pumping money into the market as it did five years ago.
Is the SPDR S&P 500 ETF Trust a Buy?
The SPDR S&P 500 ETF Trust (SPY) currently has a Moderate Buy rating among 504 Wall Street analysts. That rating is based on 417 Buy, 80 Hold, and seven Sell recommendations issued in the last three months. The average SPY price target of $751.83 implies 12.17% upside from current levels.
