- Investors are taking on a record amount of debt to buy stocks, and it’s a bullish sign for the market, according to Bank of America.
- FINRA margin debt hit $799 billion in January, representing a new all time high for the indicator.
- “Contrary to popular belief, new highs for margin debt are not bearish,” Bank of America said.
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Record highs in the stock market have been confirmed by record highs in margin debt, according to a Tuesday note from Bank of America.
Investors are taking on a record amount of debt to buy stocks, and contrary to popular belief, it’s a bullish sign for the markets, not bearish, BofA said. Instead, “it is often lower highs rather than higher highs on margin debt that have coincided with bigger equity market corrections,” BofA explained.
FINRA margin debt hit a record high of $799 billion in January, surpassing its previous high of $778 billion in December.
Previous new highs for margin debt occurred in January of 2007, January of 2013, and January 2017. After each of those instances, the S&P 500 rallied 7.7% into the October 2007 secular bear market peak, 40.7% into May 2015, and 23.9% into January 2018, according to the note.
The new January high in margin debt “confirms the new highs for the S&P 500,” BofA said.
And margin debt has more room to run higher relative to the market cap of the S&P 500, according to the note.
"Investors are not over-levered in terms of margin debt as a percentage of the S&P 500 market cap, with room to run when compared to 2007 through 2018 peak levels," BofA said.
The January high in margin debt represented just 2.55% as a percentage of market cap for the S&P 500, well below prior peeks in the 2.90% to 3.07% range.
Bank of America's view continues to be that US stocks are in a secular bull market.
"We cannot rule out pullbacks along the way, but the big move in the z-score from oversold to overbought in 2020 points to a major equity market low for the COVID-19 recession," BofA concluded.
