What do the years 1929, 2000 and 2007 all hold common? Those were years where there occurred a huge spike in stocks’ margin debt. In each of those years, to be able to grab an advantage of the stock markets’ soaring values, investors became highly leveraged in their accounts. And investors lost big each time. “The spike in margin debt was rapidly followed by a horrifying stock market crash.” Well, it’s following that same pattern again.
An all-time high in Margin debt was reached in April, 2013 (last number we have). It was in July, 2007 we had the previous high. Stocks’ margin debt has risen 29% higher than just a year ago, which is a huge jump. Since the fall of 2012 the S&P 500 has registered gains over 20%. Although key economic fundamentals continue to worsen, the stock market continues its march upward to record highs. Some economic forecasters say a significant bubble is forming fast, when will it burst is the dangling question? We are in for a market crash if history plays out as it has before when this same pattern developed.
Twice since 2000, “whenever margin debt has gone over 2.25% of GDP the stock market crashed.” That is a major red flag,
even though by itself it does not predict a stock market crash will occur soon.
Some commentators state because investors are so highly leveraged its being seen as a positive thing by some pundits in the world of financial investing.
The huge rise in margin debt is seen as an ominous sign by others. The margin debt in investor accounts has risen to nearly 2.4% of GDP (late 2013), while the New York Times has stated, “whenever we have gotten this high before a market crash has always followed… “
Amid the technology stock bubble in 1999 was the first time in recent years total margin debt went above 2.25 percent of G.D.P. Following that bubble burst, the margin debt fell lower. It started another rise in the housing boom of 2000-2005, when it came out investors obtained loans from their investment accounts to use to buy houses. That previous surge in margin loans ended badly in 2007-2008, following the same pattern as 2000.
A chart of the performance of the S&P 500 over the last twenty years can be found online. One can compare it to the margin debt charts the New York Times has published on the internet. You will find a very strong correlation between them. “Every time margin debt has soared to a dramatic new high in the past, a stock market crash and a recession have always followed.” Some commentators are asking if a similar crash awaits us?
Various things not seen since 2009 in the economy are beginning to happen all over again, which makes all this even more alarming.
Warnings are being voiced by prominent economists to warn about the approaching economic tsunami.
A specific example of wary investor’s sentiment was voiced by Alan M. Newman, a renowned investor, discussing the market’s current status in the summer of 2013:
“If anything has changed yet in 2013, we certainly do not see it. Despite the early post-fiscal cliff rally, this is the same beast we rode to the 2007 highs for the Dow Industrials. The U.S. stock market is over leveraged, overpriced and has been commandeered by mechanical forces to such an extent that all holding periods are now affected by more risk than at any time in history.”
It’s most unfortunate that many Americans won’t see that clearly ominous warning. So many persons depend on the normal media outlets and regular internet sources to do the thinking they should be doing for themselves. Currently, normal media sources insist we are not in a major stock market bubble… Who should you believe..? Historical patterns say it will happen again.