No room for complacency

Margin debt in the U.S. stock market has reached 1.1 trillion USD, a new record unseen in financial history. Combined with the fact that it is mainly private investors who have been buying while institutional investors and hedge funds have been net sellers, this setup looks increasingly fragile.

Historically, high margin debt levels have tended to amplify volatility in bear markets, as leveraged investors facing margin calls are forced to sell, accelerating declines in equity prices.

At ECP, we believe such charts — while offering a compelling narrative — should be interpreted with caution. The graph shows an absolute level of margin debt, which looks less alarming if expressed as a percentage of total U.S. market capitalization. Moreover, the amount of assets parked in money market funds also stands at record levels, suggesting there is still ample liquidity available to buy into market dips.

In conclusion, the market appears somewhat stretched (mainly in valuation terms), yet we are not rushing to the exits on the basis of this chart alone — especially as monetary policy is turning more accommodative. However, this is certainly not the time for complacency.