Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money. – Irving Fisher
Over investment and over speculation are often important; but they would have far less serious results were they not conducted with borrowed money.
FINRA margin debt, which measures how much investors borrow against securities in their brokerage accounts, has reached a record $1.42 trillion. The level is noteworthy, but the pace of borrowing deserves more attention. Margin debt often rises with stocks as higher prices increase collateral values and investor confidence. The dollar amount shows the scale of the borrowing, while the rate of growth shows how quickly investors are adding leverage.
Investor borrowing has run well ahead of an already strong stock market over the last year. The S&P 500 Index was up 25.2% year-over-year (YoY) as of June 22, while margin debt was up 53.7% at the end of May. The lower panel in our chart shows the difference between the two growth rates, with positive readings indicating that margin debt is growing faster than the S&P 500. That leaves margin debt growth ahead of the index by 28.5 percentage points, placing the gap in the top decile of observations since 1997. Investors are adding leverage after a large market advance fueled by AI enthusiasm, megacap leadership and continued demand for risk assets.
Borrowing on margin often rises as markets reward risk-taking. Higher prices give investors more room to borrow, and stronger returns make leverage easier to carry. The risk emerges when prices fall. Losses reduce collateral values, and borrowed exposure can force investors to cut positions into weakness. Margin debt itself won’t trigger the decline, but it can turn losses into forced selling.
Historically, forward outcomes have been notably weaker once the gap has crossed 20 percentage points. Since 1997, months in which margin debt growth exceeded S&P 500 growth by at least 20 percentage points were followed by a median 12-month S&P 500 price return of negative 15.0%. Negative 12-month returns occurred in 91.3% of completed observations. The median 12-month maximum drawdown was negative 22.9%, and the median 24-month forward return was negative 26.0%. Large gaps between leverage growth and equity-price gains have tended to appear before weaker returns and deeper drawdowns. That history makes today’s gap difficult to write off as normal bull-market borrowing.
Today’s gap sits among the larger historical extremes. Top-decile episodes clustered around the dot-com period and the run-up to the Global Financial Crisis, two cycles in which leverage and risk appetite expanded before major drawdowns. The pandemic reopening period produced a shorter and less damaging signal, but borrowing still accelerated after a powerful market rebound. Smaller positive gaps have not led to the same weak returns and drawdowns. The gap is above the 20-percentage-point threshold and ranks in the top decile of the data since 1997.
The S&P 500 has already delivered a large YoY gain, and investor borrowing has increased even faster. Similar episodes have often been followed by weaker forward returns and deeper drawdowns. That leaves less room for disappointment if and when risk appetite starts to fade.
Between the Lines is a weekly blog by DoubleLine Portfolio Managers Sam Garza, Joseph Mezyk and Quant Analysts Fei He, CFA and Sunyu Wang that breaks down topical macro and market issues. For questions or suggestions please e-mail us at betweenthelines@doubleline.com. The views and opinions expressed herein are those of the authors and do not necessarily reflect the views of DoubleLine Capital LP, its affiliates or employees.
