Key facts
- Margin debt has reached record highs, with some strategists concerned about increased risk.
- A steep tech sell-off could trigger margin calls, leading to forced selling.
- US households hold a record $64.6 trillion in corporate equities and mutual fund shares.
- 43% of US investors surveyed in September reported trading with leverage.
- Leveraged ETF assets peaked at around $200 billion in the summer.
Margin debt held by investors has reached record highs, prompting concerns among some Wall Street strategists about an increased risk of a sudden stock market decline. The fear is that a sharp sell-off, particularly in tech stocks, could trigger margin calls, leading to a wave of forced selling that could derail the current bull market.
Investors use margin debt to borrow funds from brokers to buy stocks. If the value of their positions falls below a certain threshold, they face a margin call, requiring them to deposit more money. Failure to do so can result in brokers selling their positions, sometimes at a loss.
FINRA data shows that debit balances in customers' securities margin accounts hit a record $1.5 trillion in June. While levels have slightly decreased, they remain elevated, with margin debt at $1.4 trillion in August, a 27% increase over the past year. Analysts note that falling margin debt from elevated levels has historically signaled lower future stock returns, and a significant drop could initiate a self-reinforcing deleveraging wave.