Stock Market Leverage Spikes, Margin Debt Up 42% YoY. Fed Warns about High Leverage Ratio of “Younger Retail Investors” | Wolf Street

The only leverage data we do get on a monthly basis is margin debt at brokers, reported by FINRA. And we got another doozie: Stock market margin debt spiked by $33 billion in October from September to another all-time high of $936 billion, up by $277 billion, or by 42%, from a year ago, and up by 67% from October 2019

This type of stock market leverage doesn’t predict when the market will crater. What it does predict is that when this market is going down hard enough, it will trigger massive bouts of forced selling as margin calls are going out, and leveraged investors have to sell stocks to pay down their margin debt, which then pushes down prices further, which then triggers more forced selling, and more fears of forced selling, as portfolios are being liquidated, thereby accelerating the swoon.

Here’s the long-term view of margin debt. Given that the purchasing power of the dollar has dropped over the period, it’s not the long-term increases in absolute dollar amounts that matter, but the steep increases in margin debt before the selloffs, and the magnificent increase underway now:

Stock Market Leverage Spikes, Margin Debt Up 42% YoY. Fed Warns about High Leverage Ratio of “Younger Retail Investors” | Wolf Street