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Margin Debt Nearing $1 Trillion May Not Be a Sign of Euphoria

Margin debt just shot back to an all-time high. Is it a sign of an overheating market? Not quite yet, says JPMorgan.

Margin Debt Nearing $1 Trillion May Not Be a Sign of Euphoria
The Bombay Stock Exchange. (Photographer: Dhiraj Singh/Bloombergmberg)

Margin debt just shot back to an all-time high in the stock market. Is it a sign of an overheating market? Not quite yet, says JPMorgan Chase & Co.’s prime broker. 

Brokerages extended more than $910 billion in credit to clients at the end of August, up 8% from the previous month, resuming a yearlong climb, according to data compiled by FINRA last week. The amount, approaching the market value of Facebook Inc., is the most since the dataset began in 1959.  

While the elevation may evoke warnings from bears who see the latest spike as evidence of runaway investor enthusiasm, analysts who assess hedge fund flows at JPMorgan say comparing the velocity relative to the market’s price gains shows sentiment is far from euphoric. 

Margin Debt Nearing $1 Trillion May Not Be a Sign of Euphoria

Over the past 12 months, margin debt has climbed 41%. While that’s above the 29% gain seen in the S&P 500, it’s not totally untethered from the slope of equities. For context, during the past market tops, margin loan growth outpaced share gains by twofold in 2007 and almost four times in 2000. 

“While there are many potential reasons one could cite for market caution, the level and changes in margin debt do not appear to be setting us up for extreme market drawdowns like we saw in 2000 and 2007,” JPMorgan analysts including John Schlegel wrote in a note Friday. 

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