The New York Stock Exchange is showing something that we would be more concerned about than optimistic. Margin debt at the NYSE grew for the ninth consecutive month and hit another record high in April, as investors have now borrowed on margin some $384.37 billion. This is only about 1.3% higher than the $379.52 billion in March, but it is almost 29% higher on a year-over-year basis, versus the $298.50 billion from April 2012.
The prior margin borrowing high was $381.37 billion, back in July 2007. This is an important reflection because that is months before the recession started and when certain aspects of the economy began giving warnings signs of worse things to come. What we would point out that may offer a break in worries here is that the July/July one-year comparison in margin borrowing at the peak in 2007 was a gain of almost 65%, and that is a much larger percentage gain than the year-over-year gain of almost 29% from the year-over-year comparison to the peak in 2013.
What is so different here is that the low rates (almost zero) seemingly should have started bringing back the record margin levels last year. It is concerning that it has happened at a time after the rally is so long in tooth. Investors are chasing returns with stocks already up well into the double-digits so far in 2013. We would also point out that the American Association of Individual Investors weekly bullish sentiment just surged massively in the past week, and that can be yet another reverse indicator ahead.
As a reminder, margin debt does not have to be reinvested in stocks just because it is borrowing against stocks. Borrowing on margin against big equity gains is often cheaper to borrow against positions than it is to get new loans, depending on the use and time to repay.
If you think that this is a one-off, this is not the first concern and it may not be the last. Bloomberg outlined concern at the start of this month about the margin borrowing being off the chart in March and showed a comparable chart for comparison against the S&P 500 Index.
Apparently those borrowing on margin were not too concerned with a “Sell in May and go away” theme this year.