Investors are borrowing a record amount to bolster their stock portfolios – and it's raising red flags reminiscent of the period before the Great Financial Crisis

This post was originally published on this site

© JOHANNES EISELE/AFP via Getty Images JOHANNES EISELE/AFP via Getty Images

  • Investors are borrowing a record amount against their investment portfolios, according to margin debt data from FINRA.
  • At the end of February, investors had borrowed $814 billion against their investments.
  • That’s a 49% year-over-year increase, representing that fastest jump since 2007.
  • Sign up here for our daily newsletter, 10 Things Before the Opening Bell.

A record surge in margin debt is raising eyebrows as the stock market continues to surge to new all-time-highs.

Load Error

Investors borrowed $814 billion against their investment portfolios at the end of February, according to data from FINRA cited in a report in the Wall Street Journal on Thursday. That’s a record high reading for margin debt, well above January’s record of $799 billion.

It’s common for margin debt to rise and fall with the stock market, as increased portfolio values afford investors more leverage to take on from their brokers. But the record rise in margin debt is also one of the fastest on record.

Margin debt saw an annual surge of 49% in February, which was the fastest jump since 2007. Prior to 2007, the fastest jump in margin debt was in 1999. Both instances were just prior to an epic melt-down in the stock market, amid the Great Financial Crisis of 2008 and the dot-com bubble unwind in 2000.

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.

That dynamic was on full display last month, after a downturn in ViacomCBS spurred a massive $20 billion liquidation event for family office Archegos Capital, which was long shares of the media company. That epic unwind by a number of prime brokers that serviced Archegos led to billion dollar losses for banks that were slow to unwind the positions, like Nomura and Credit Suisse.

But until a broad market decline materializes, expect margin debt to continue its surge to record highs as it’s led by new highs in the stock market.

Continue Reading