Please ensure Javascript is enabled for purposes of website accessibility

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

By Blake Bos - Feb 8, 2014 at 9:00AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Are stock market investors setting themselves up for a record-breaking fall? Here's one big warning sign for investors to consider.

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 (SCTY.DL) has been a prime benefactor of the recent bull market, rising 403% year to date, compared to the Dow Jones Industrial Average's (^DJI -0.50%) 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.

 

Blake Bos has no position in any stocks mentioned. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$33,980.32 (-0.50%) $-171.69
SolarCity Corporation Stock Quote
SolarCity Corporation
SCTY.DL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
402%
 
S&P 500 Returns
129%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/17/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.