By Jeffrey P. Snider
We still may not know the difference between cause and effect, but margin debt balances dropped in March for the first time in ten months. The $14 billion decline in margin debt was also coincident to an increase of $6 billion in relative cash balances in equity accounts at FINRA dealers. That meant total investor net worth “improved” by a little more than $20 billion.
Under more “normal” circumstances that might be significant, and it may yet be, but it only reduces investor complacency to the extreme levels we saw just the month before. The jump in margin in February was astounding, meaning that March simply retraced only the last extreme move in a string of them.
Since July 2012, margin debt balances are 56% higher. That surge in debt corresponds exactly with the spike in valuations. That includes, as I noted last week, the dramatic valuations of small cap stocks.
That raises the possibility that the relatively minor reversal in margin and complacency in March was in response to changes in perceptions over small cap stock valuations. It could also refer to extreme margin levels leading prices. In other words, did such stretching of investor positions lead to a decline in margin usage, thus taking the steam out of the fast rising small caps and momentums, or was an inflection in pricing and valuations the reason for the decline in margin?
Whatever may be the case, the timing is suspicious. I don’t think it is much of a stretch to see the relation between this minor disruption of debt intrusion marking the most recent peak in high flyers. The high for the Russell 2000 was in early March.
If there is causation here, in whichever direction, it has yet to spill out to the wider market (though margin data is unfortunately delayed). If there is an impact on larger cap stocks, it isn’t obvious or fully apparent. The real question is whether it might at some point further on.