Examining Historical Margin Debt

Includes: SPY
by: Jake Huneycutt

In my most recent article, "Now is the Time to Be Fearful," I examined some of the macro risk factors for the market in the next few years. One commenter (Seeking Alpha contributor Illuminati Investments) noted an additional risk factor that I had failed to mention: high margin debt levels. For this article, I want to examine that very issue.

Let's start off with the basics. The chart below shows US margin debt in millions of US Dollars. We set a record at $384 billion in April 2013.

It's important to note that these are nominal figures and therefore, can be a bit misleading. In order to solve that problem, we need to examine margin debt relative to "total market capitalization" or "nominal GDP." I decided to go with the latter.

In the chart below, you can see margin debt as a % of GDP since 1959.

This paints a more realistic picture. Margin debt still appears to be on the high side historically, but somewhat below the two big market peaks in 2000 and 2007, when it hit 2.73% and 2.62% of GDP respectively. In April '13, it hit 2.31% of GDP and drifted down to 2.23% of GDP as of August.

We can also compare this to the S&P 500 (NYSEARCA:SPY) index. The chart below examines the two side by side and you can see that the two figures appear very highly correlated with one another.

Interestingly, in spite of the high correlation, the two figures have been moving in opposite directions since April, with the S&P 500 shooting higher, while the margin debt has been nudged slightly downward.

CPI-Adjusted S&P 500

One final thing I decided to look at was how inflation might impact these numbers. I created a CPI-adjusted S&P 500 index, which can be seen below.

We can re-compare that to the margin debt levels.

This isn't radically different from the first comparison, but it does re-emphasize the high degree of correlation between the two figures.

The high margin debt levels are another risk factor for the market moving forward. While we're not at record levels yet, we still are in the high end of the historical range around 2.25% of GDP. I wouldn't make too many dramatic conclusions from this data, but it does showcase how margin debt levels can drive the market in either direction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.