You may have run across an article or two stating that NYSE margin debt recently
reached an all-time high (ATH). Some of the articles equate a new high in margin
debt with a new high in speculation, which must mean the end is near and we
should all stock up on canned goods.
What Do The Facts Say About Margin And Stocks?
You could have seen similar "New All-Time Highs In Margin Debt Is A Red Flag
For Stocks" headlines in February 1978, April 1983, and February 1993. Were
those bearish warnings helpful? You can decide after reviewing a detailed look
at new highs in margin debt and returns in the stock market.
1978 - A New All-Time High In Margin Debt
The chart below could have been used as "bearish" evidence in 1978 since margin
debt hit levels never seen prior to that time.
1978 - What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
The "Bearish" Warnings Kept Coming
If we interpreted a new all-time high in margin debt as bearish, we would
have had a ton of "bearish" ammunition over the next three years. Assume we
are at point A or February 28, 1978. Below are the headlines we could have
seen between point A and point B, which provides some context for 2015 headlines
related to margin:
Margin Debt Hits New All Time High - February 1978 (point A)
Margin Debt Hits New All Time High - March 1978
Margin Debt Hits New All Time High - April 1978
Margin Debt Hits New All Time High - May 1978
Margin Debt Hits New All Time High - June 1978
Margin Debt Hits New All Time High - July 1978
Margin Debt Hits New All Time High - August 1978
Margin Debt Hits New All Time High - September 1978
Margin Debt Hits New All Time High - September 1980
Margin Debt Hits New All Time High - October 1980
Margin Debt Hits New All Time High - November 1980 (point B)
How Did Stocks Perform Between Points A and B?
We have now reached point B or November 30, 1980. How did stocks do between
point A and point B as margin debt posted 11 new all-time highs? The answer
is extremely well. The S&P 500 closed at 87.04 on February 28, 1978 (point
A). On November 30, 1980 (point B), the S&P 500 closed 140.52. Therefore,
if we sold all our stocks when margin debt hit a new all-time high on February
28, 1978, we would have missed a 61.44% gain in the S&P 500 (see chart
below). In summary, during a period where margin debt posted 11 new all-time
highs, stocks gained over 61%.
1983 - A New All-Time High In Margin Debt
As shown in the chart below, we could have penned a "bearish" warning about
a new all-time high in margin debt in April 1983.
1983 - What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
The "Bearish" Warnings Kept Coming
If we interpreted a new all-time high in margin debt as bearish, we would
have had a ton of "bearish" ammunition over the next four years. Assume we
are at point C or April 30, 1983. Below are the headlines we could have seen
between point C and point D, which provides some context for 2015 headlines
related to margin:
Margin Debt Hits New All Time High - April 1983 (point C)
Margin Debt Hits New All Time High - May 1983
Margin Debt Hits New All Time High - June 1983
Margin Debt Hits New All Time High - July 1983
Margin Debt Hits New All Time High - August 1983
Margin Debt Hits New All Time High - September 1983
Margin Debt Hits New All Time High - October 1983
Margin Debt Hits New All Time High - November 1983
Margin Debt Hits New All Time High - December 1983
Margin Debt Hits New All Time High - January 1984
Margin Debt Hits New All Time High - July 1984
Margin Debt Hits New All Time High - March 1985
Margin Debt Hits New All Time High - April 1985
Margin Debt Hits New All Time High - May 1985
Margin Debt Hits New All Time High - June 1985
Margin Debt Hits New All Time High - August 1985
Margin Debt Hits New All Time High - October 1985
Margin Debt Hits New All Time High - November 1985
Margin Debt Hits New All Time High - December 1985
Margin Debt Hits New All Time High - March 1986
Margin Debt Hits New All Time High - April 1986
Margin Debt Hits New All Time High - May 1986
Margin Debt Hits New All Time High - June 1986
Margin Debt Hits New All Time High - July 1986
Margin Debt Hits New All Time High - August 1987
Margin Debt Hits New All Time High - September 1986
Margin Debt Hits New All Time High - October 1986
Margin Debt Hits New All Time High - November 1986
Margin Debt Hits New All Time High - March 1987
Margin Debt Hits New All Time High - April 1987
Margin Debt Hits New All Time High - July 1987
Margin Debt Hits New All Time High - August 1987 (point D)
How Did Stocks Perform Between Points C and D?
We have now reached point D or July 30, 1987. How did stocks do between point
C and point D as margin debt posted 32 new all-time highs? The answer is extremely
well. The S&P 500 closed at 164.43 on April 30, 1983 (point C). On July
30, 1987 (point D), the S&P 500 closed at 318.05. Therefore, if we sold
all our stocks when margin debt hit a new all-time high on April 30, 1983,
we would have missed a 93.43% gain in the S&P 500. In summary, during a
period where margin debt posted 32 new all-time highs, stocks gained over 93%.
1993 - A New All-Time High In Margin Debt
Since the last cycle of new all-time highs in margin debt started ten years
before February 1993, many investors forgot there is no stock market law that
says new all-time highs in margin debt and stock prices cannot continue for
several years. Therefore, if we were new to the markets, the chart below from
February 1993 could have been used as "be careful" evidence for equity investors.
1993 - What Happened Next?
Margin debt continued to expand and post new highs as shown in the chart below.
Seven Years Of "Bearish" Warnings Followed
Assume we are at point E or February 28, 1993. Below are the headlines we
could have seen between point E and point F, which provides some context for
2015 headlines related to margin:
Margin Debt Hits New All Time High - February 1993 (point E)
Margin Debt Hits New All Time High - March 1993
Margin Debt Hits New All Time High - April 1993
Margin Debt Hits New All Time High - May 1993
Margin Debt Hits New All Time High - June 1993
Margin Debt Hits New All Time High - August 1993
Margin Debt Hits New All Time High -September 1993
Margin Debt Hits New All Time High -October 1993
Margin Debt Hits New All Time High - November 1993
Margin Debt Hits New All Time High - December 1993
Margin Debt Hits New All Time High - January 1994
Margin Debt Hits New All Time High - February 1994
Margin Debt Hits New All Time High - August 1994
Margin Debt Hits New All Time High - January 1995
Margin Debt Hits New All Time High - April 1995
Margin Debt Hits New All Time High - June 1995
Margin Debt Hits New All Time High - July 1995
Margin Debt Hits New All Time High - August 1995
Margin Debt Hits New All Time High - September 1995
Margin Debt Hits New All Time High - November 1995
Margin Debt Hits New All Time High - March 1996
Margin Debt Hits New All Time High - April 1996
Margin Debt Hits New All Time High - May 1996
Margin Debt Hits New All Time High - June 1996
Margin Debt Hits New All Time High - September 1996
Margin Debt Hits New All Time High - November 1996
Margin Debt Hits New All Time High - December 1996
Margin Debt Hits New All Time High - January 1997
Margin Debt Hits New All Time High - February 1997
Margin Debt Hits New All Time High - March 1997
Margin Debt Hits New All Time High - May 1997
Margin Debt Hits New All Time High - June 1997
Margin Debt Hits New All Time High - July 1997
Margin Debt Hits New All Time High - August 1997
Margin Debt Hits New All Time High - September 1997
Margin Debt Hits New All Time High - October 1997
Margin Debt Hits New All Time High - February 1998
Margin Debt Hits New All Time High - March 1998
Margin Debt Hits New All Time High - May 1998
Margin Debt Hits New All Time High - June 1998
Margin Debt Hits New All Time High - July 1998
Margin Debt Hits New All Time High - March 1999
Margin Debt Hits New All Time High - April 1999
Margin Debt Hits New All Time High - May 1999
Margin Debt Hits New All Time High - July 1999
Margin Debt Hits New All Time High - September 1999
Margin Debt Hits New All Time High - October 1999
Margin Debt Hits New All Time High - November 1999
Margin Debt Hits New All Time High - December 1999
Margin Debt Hits New All Time High - January 2000
Margin Debt Hits New All Time High - February 2000
Margin Debt Hits New All Time High - March 2000 (point F)
How Did Stocks Perform Between Points E and F?
We have now reached point F or March 30, 2000. How did stocks do between point
E and point F as margin debt posted 52 new all-time highs? The answer is extremely
well. The S&P 500 closed at 443.38 on February 28, 1993 (point E). On March
30, 2000 (point F), the S&P 500 closed at 1487.92. Therefore, if we sold
all our stocks when margin debt hit a new all-time high on February 28, 1993
we would have missed a 235.59% gain in the S&P 500. In summary, during
a period where margin debt posted 52 new all-time highs, stocks gained over
235%.
Moral Of The Story
This article examines one question and one question only:
Is a new all-time high in margin debt, viewed in isolation, a reason
to be concerned about stocks?
The answer is a definitive "no". In fact, you can make an argument that a
new all-time high in margin debt leans bullish rather than bearish. How can
we say that? In the examples above, we listed 95 new all-time highs in margin
debt. Of those 95, only 3 came near a significant or long-lasting peak in stocks.
Said another way 97% of the new all-time highs in margin debt shown above were
followed by gains in stocks; only 3% proved to be accurate bearish warnings.
2015: Bigger Picture Aligns With Margin
As we noted in this recent video,
which compares 2015 to historical transitions to a bear market, the present
day evidence is not screaming "a bear is right around the corner". As always,
we will take it day-by-day and remain flexible and open-minded. Given the data
we have in hand, including margin debt, our market
model is still calling for an equity-heavy investment allocation.