ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.
The practice of buying stocks with borrowed funds becomes most popular at long-term market peaks, so it's a bit disconcerting that total U.S. margin debt is revisiting the all-time high levels of 2006. Thankfully, there's good reason to ignore the negative implications of the reading in the current market.
The first chart shows total margin debt borrowed by clients of New York Stock Exchange member firms plotted against the S&P 500. At $377-billion (U.S.), total debt in margin accounts is hovering close to the $381-billion record set in July 2007.
RUN FOR YOUR LIVES! MARKET'S GONNA CRASH! Nah, not really. The nominal amount of margin debt is high, but the amount is not growing fast enough to indicate excessive optimism.
The second chart shows year over year growth in margin debt against the S&P 500 year over year. The three per cent growth in June is actually low relative to history and, in fact, May saw a decline.
One thing that is clear from the chart is that investors probably should take their money and run if margin debt increases by more than 40 per cent over any 12 month period. Sharp declines in the equity benchmark have occurred each time this has happened.
But we're nowhere near that level yet. At this point, the increase in margin debt, even at new highs, does not indicate danger ahead.
Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .