Even with Higher Interest Rates – Investors are Borrowing & Buying!
All multi-year bull markets, regardless of asset class, are propelled by the expansion of credit.
While there are concerns about the overpriced equity valuations and high interest rates, stock investors are undeterred and have actually increased their use of margin credit by 34% with the Broker Call Rate of 6.75%.
Simply put, the “smart money” is still bullish on U.S. equities in spite of high borrowing cost.
What is Margin?
Margin loans are backed by the assets held in a brokerage account. This allows investors to access their equity by either withdrawing funds from the account or buying additional stocks without having to deposit more funds. It allows aggressive investors to increase the return on investments in larger, conservative companies where shares are more liquid than the smaller companies’ shares.
Stock Market Credit Cycle –
As can be seen on the following chart, total outstanding margin significantly contracted throughout the bear markets of 2000-02, 2008-09 and followed by a rapid credit expansion that fueled new bull markets. The same can be said of the market correction of the 2022 (triggered by rising interest rates to battle high inflation) as traders paid down debt. But, the trend reversed in early 2023 as credit rapidly expanded and powered the stock market to new heights. (See charts)
I am a historian who manages money and use many indicators to evaluate stocks, bonds, real estate and commodities. While no indicator is perfect at predicting the market’s future path, monitoring investor sediment through their willingness to borrow money to invest is a good gauge on investor confidence.
Trend is your friend!
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