Margin Debt Continued to Climb to New Heights in October

Margin debt is the amount of money an investor borrows from their broker via a margin account. Trading with a margin debt can magnify gains because an investor can benefit from the upside of any stock without having to invest 100%, resulting in greater profit. On the flip side, trading with margin debt can also exacerbate losses because if a stocks value were to depreciate, the investor may face a margin call and would need to come up with additional cash to reach the minimum requirement. Margin debt is often seen as a measure of investor sentiment and risk appetite. High levels of margin debt can signal confidence, but extreme spikes may also indicate excessive speculation, increasing the risk of market instability.

Margin debt continued to climb to new heights in October, reaching a new all-time high of $1.18 trillion. This represents a 5.1% rise from September and marks the sixth straight monthly increase. The debt level is up 45.2% compared to one year ago. When adjusted for inflation, the debt level was up 4.8% month-over-month, reaching its highest level in history, and is up 40.7% year-over-year.Note that the most recent inflation figure is extrapolated based on the previous two months data.

Lets take a closer look at the relationship

between margin debt and the stock market, using the Sp 500 as our benchmark. The first chart shows the two series in real terms

adjusted for inflation to todays dollar

using the consumer price index (CPI) as the deflator.

Starting in 1997, a period well into the long-running bull market that began in 1982 and nearing the tech bubble, we can observe some interesting patterns:

• Late 1999 - March 2000:Margin debt experienced a dramatic increase, peaking in March 2000. This coincided with an interim daily high for the SP 500, although the markets highest monthly close for that year occurred later in August.
• 2006 - July 2007:Another significant surge in margin debt began in 2006, reaching its peak in July 2007, just three months before the SP 500 reached its peak.
• February 2009:Following the financial crisis, margin debt hit a low point in February 2009, the same month the stock market bottomed out. Subsequently, margin debt began another substantial period of growth.
• Post-COVID Pandemic (October 2021 - December 2022):We saw a similar pattern after the initial COVID-19 pandemic. Margin debt soared to a high in October 2021, just two months before the SP 500 reached its peak in December 2021. The market then bottomed in September 2022, and margin debt followed suit, reaching its most recent low in December 2022.
• Late 2023 - Early 2025:The most recent increase in margin debt began in late 2023 and continued into 2025. The SP 500 reached an inflation-adjusted high in November 2024, while margin debt reached a relative inflation-adjusted peak in January 2025.
• Now:Margin debt rose for a sixth straight month in October, now sitting at its nominal and real peak. Meanwhile, the SP 500 has increased for six straight months and is also at its nominal and real peaks.

By examining these periods, we can observe a potential relationship between significant increases in margin debt and subsequent market peaks, as well as a correlation between market bottoms and troughs in margin debt.