In the seven months since the peak in October, margin debt has dropped by $183 billion, or by 20%, from the gigantic levels last year, an indicator of the turmoil in the market, but also an indicator that leverage is still extremely high and has a long way to go:
Sharp increases in margin debt are associated with increases in stock prices because leverage creates buying pressure with borrowed money; but then the tables turn, and in a vicious mechanism that includes margin calls, major stock market events are associated with sharp declines in leverage. Margin debt can serve as an effective warning about issues in the stock market.
The absolute amount of leverage in the stock market, across all forms of leverage, is unknown and no one tracks it. Margin debt reported by brokers is the only form of stock market leverage that is tracked and reported on a monthly basis.
Even some of the biggest stocks plunged far enough to have triggered forced selling among margined investors (percentages from their highs through June 14 mid-day):
- Netflix: -76%
- Amazon: -45%
- Tesla: -46%
- Meta: -57%
- Nvidia: -54%
- Salesforce: -47%
- Intel: -44%