Stock Market Warning Signs: Record $444.9 Billion of Debt Is Now Invested in the Market

The New York Stock Exchange recently updated its stock market margin-debt data, showing that Main Street and Wall Street are still continuing to dump billions in borrowed dollars into the stock market.

Borrowed money in the stock market, known as "margin debt," hit an all-time high of $444.9 billion in December, which was an increase of 5% over the previous month. This puts margin debt, adjusted for inflation, extremely close to the levels seen during the housing bubble and above highs set during the dot-com bubble. To put that into perspective, if this margin debt were a country's GDP, it would be the 30th-largest economy in the world, right below Taiwan's.

Margin debt is accrued when someone takes out a loan and invests that money into the stock market. Due to historically low interest rates, the appeal of margin debt is much greater today than in previous bull markets. Based on the attractiveness of low-interest debt, it's likely that margin debt could surpass the adjusted highs set during the housing bubble. Look for January data to further support this.

One stock benefiting from the bull market
SolarCity (NASDAQ: SCTY  ) has been a prime benefactor of the recent bull market, rising 403% year to date, compared to the Dow Jones Industrial Average's (DJINDICES: ^DJI  ) gain of 13%. This rally stems from the belief that the company will continue to aggressively grow its install base, but there seem to be some problems brewing around how the company calculates its cost of capital, and it could be taking on unprofitable projects in the long term. This could be quite the volatile stock in 2014, and definitely one to watch during earnings seasons this year.

What to look for
In the following video, Motley Fool analyst Blake Bos goes over the most recent margin-debt data, gives examples of how margin debt works in the market, and explains how investors can make use of this data.

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Read/Post Comments (11) | Recommend This Article (16)

Comments from our Foolish Readers

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  • Report this Comment On February 08, 2014, at 10:07 AM, CQMckay wrote:

    I'm sure the government idiots will want to do a bailout for all the people who are gambling with borrowed money just like when they tried it with the housing bubble and then blame big business for taking advantage of them.

  • Report this Comment On February 08, 2014, at 10:11 AM, captainbuck39 wrote:

    Thanks for the information and the handy chart. This may be a dumb question but do you know if there's any way to find out how much of a particular company's float is held on margin? Or is that something that is tracked at all?

  • Report this Comment On February 08, 2014, at 10:17 AM, noneother wrote:

    Selling short is all done on margin aka borrow....HOW much of this debt is attributed to short sellers?

  • Report this Comment On February 08, 2014, at 10:22 AM, captainbuck39 wrote:

    @noneother. Good point. I didn't think of that and it is right of course. But is there any way to know how much margin is being used by "long" buys.

  • Report this Comment On February 08, 2014, at 10:51 AM, explorerruss wrote:

    What is backing that debt? Why, it's the magical money coming out of the Fed. They're Bernanke Bucks. That money has to go somewhere so why not leverage it in the market? Or would you prefer a nice "safe" savings account at .oooooooo1% interest? Yeah, right.

  • Report this Comment On February 08, 2014, at 1:55 PM, TMFBos wrote:

    "NYSE member organizations are required to report monthly their aggregate debits (amount borrowed by customers to purchase securities) in margin accounts($449B), as well as aggregate free credits (cash balances) in cash($129B) and margin accounts($165B)."

    As of December 2013, $165.6B of credit balances were held in margin accounts. That represents represents any monies borrowed to short a stock and the monies used to satisfy the margin account balance requirements under Regulation T. This amount was down 2.7% in 2013. A balance in this account could indicate a higher amount of shorting and/or increased margin requirements.

    -http://www.investopedia.com/terms/c/creditbalance.asp

    Also, there was $129B of credit accounts held in cash, which represents customer cash held in a margin account that can be withdrawn at any time. This amount was up 11% in 2013.

    -http://www.investopedia.com/terms/f/freecreditbalance.asp

    So what does it mean?

    Looking at margin debt isn't a straight forward process, but I believe large amounts of debt in the market can create for some rather volatile situations.

    Keep in mind there's never been any conclusive studies to show causality between high debt levels and market crashes. So using margin debt as some sort of timing device would be ill advised in my opinion. Although, for me personally, when i see margin debt racing higher it makes me really focus on building some cash to deploy if the market were to sell off.

    To each their own

    -Blake

    Fun Fact: did you know that since 1999, their has only been 5 months where margin credit balances were higher than margin debit balances. This occurred in April of 2008 and continued through August 2008. What followed was known as the Great Recession.

  • Report this Comment On February 08, 2014, at 3:13 PM, comosichiam wrote:

    For some reason over the years I have been leery of the stock market equating it with gambling in Las Vegas. To base an economy on an easily manipulated outcome by certain elements dealing in the market regardless what you may believe having the market play any role in the financial ups and downs of our country to me it is idiotic to place such power in the hands of what I believe are nothing but high stakes gamblers.

  • Report this Comment On February 08, 2014, at 7:19 PM, KGerbil1 wrote:

    The author left out an interesting point. Margin debt can be used for anything.

    I used it as a bridge loan to buy a house before I sold the old one.

    I understand that it is high right now, and that is not promising, but ALL margin debt does not go into the stock or bond markets, it can go anywhere, including for consumption, which would be even worse!

  • Report this Comment On February 08, 2014, at 9:05 PM, camarodan64 wrote:

    the chart is old and the margin calls are done already, 2 weeks ago this would have been good.

  • Report this Comment On February 08, 2014, at 9:05 PM, camarodan64 wrote:

    old chart, margin calls are done.

  • Report this Comment On February 08, 2014, at 9:20 PM, camarodan64 wrote:

    no usa credit crisis this time

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