The stock market uptrend has extended for more than 11 years.
Even so, instead of displaying caution, investors have been borrowing to buy stocks like there’s no such thing as a bear market.
Alan M. Newman, editor of Crosscurrents (www.crosscurrents.net), is a market veteran who has seen many bull and bear markets.
He recently published this “startling” chart of what he calls Net Investment Liquidity, in which he subtracts total U.S. mutual fund cash from total New York Stock Exchange margin debt.
Newman said. “We’ve seen a lot in 56 years of observation and this appears to be the riskiest environment in my lifetime.”
Margin debt as a percentage of
U.S. disposable personal income hit 4.6% in February, well above the extremes of approximately 4% in 2000 and 2007.
With ‘lopsided commitments” to leveraged long funds and all kinds of other arcane financial instruments, the use of margin to buy stocks is far higher than the NYSE figures indicate.
An April 9 Business Insider article offered this angle:
Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007…
Leverage is a double-edged sword for investors, as many take on the debt to buy more stocks.
That is a winning strategy in a bull market, but a market correction can spell doom for investors who have too much leverage and need to sell equities or deposit more cash to meet margin calls, which can further exacerbate a downturn in stocks.
History shows that bull markets usually reverse just when confidence is at its zenith — the precise moment to exact maximum damage on stock portfolios.