By Raul Elizalde
One of the many defining issues of our time is the rise of betting on anything. Ever since the Supreme Court ended the ban on sports betting in 2018, sites such as DraftKings and FanDuel have allowed people to bet on pretty much any sports outcome. The Court went further in 2024, eliminating bans on betting on political outcomes and almost everything else. More platforms, such as Kalshi and Polymarket, entered the fray, making it easy and legal for people to gamble as they wished.
Perhaps this has something to do with the astronomical rise in loans extended to retail investors to buy stocks with borrowed money. This is known as “margin debt” or, more technically, “Debit Balances in Customers’ Securities Margin Accounts.” It is tabulated by FINRA on a monthly basis. The increase does, indeed, look enormous.
sources: FINRA
Lately, some analysts have warned clients that such an increase does not bode well for the stock market, since similar spikes in margin debt have preceded market slumps.
This, however, may be a hasty conclusion. FINRA margin debt balances as a percentage of the market capitalization of the S&P 500 may be a better measure of how stretched market sentiment actually is. Elevated ratios could suggest high speculative leverage, meaning the market is highly sensitive to volatility and vulnerable to rapid, cascading sell-offs if margin calls are triggered. But that percentage, although higher lately, remains well within historical levels.
source: FINRA, Standard & Poors
Yet another way of looking at this is to compare margin debt with total household liabilities. This percentage is indeed at an extreme and reached a peak before the implosion of the early-2000s dot-com bubble and another, much lower peak before the 2008 financial crisis. But it also reached high levels from 2015 through 2018, just as the market was enjoying a very strong bull market that extended through the end of 2021. An even higher peak at that time did, to be sure, precede a 25% market slump in 2022, but the rally soon resumed and has carried the market to today’s far higher levels.
source: FINRA, Federal Reserve Bank of St. Louis
Given the surge in AI-related stocks and other technology-centric equities, much of the increase in margin debt may be concentrated in those sectors. While there are no published data on margin debt by stock or sector in the United States, a similar increase prompted a recent analysis by the Bank of Korea, which revealed a disproportionate amount of borrowing in that country’s technology sector, particularly in Samsung and SK Hynix. The bank raised rates last week, triggering a sharp unwinding of leveraged trades that hit Samsung especially hard.
Margin debt is indeed at a record, but it hardly represents a systemic fault line for the market. More likely, as in Korea, it leaves the technology sector vulnerable to margin calls, automatic unwinding of positions and sudden drops in value. Margin debt would not necessarily be the main cause of such a decline. Rather, it is another data point reflecting investors’ euphoric optimism about the transformational power of AI. It is far from the only measure suggesting that such optimism could be overdone.
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