The S&P 500's surge is continuing, but for how long?

Market watchers expect stocks to rise as the US economy emerges from a harsh winter, but debt is worryingly high.

by Rachel Savage
Last Updated: 20 Mar 2014

The S&P 500 rose to a new record high of 1859.45 at the end of last week and looks like it’ll climb further for now - if Russia’s creeping takeover of the Crimea doesn’t put a dampener on investors’ fun…
 
The US’ benchmark share index had retreated for the last two weeks of January (see chart below) after a run of poor economic data. However, traders now seem to be blaming the US’ unusually Arctic winter rather than underlying weakness in the economy, shrugging off worse than expected growth figures on Friday.

Source: Yahoo Finance

However, one indicator stands out as a warning sign: the amount of money being borrowed to buy shares, otherwise known as margin debt. The level of margin debt has been hitting record highs in the last few months and now stands at $451bn, up more than 20% in the last year.
 
The last time it climbed so high so fast? Just before the financial crisis six years ago. As the chart below shows, margin debt also peaked just before the dot com bubble burst in 2000. High borrowing tends to worsen stock market falls, as investors are forced to sell off their shares fast to try and pay back what they owe before prices fall further after stock brokers make the dreaded margin call.

Source: dshort.com

Most market watchers expect the US economy to rebound into spring when the weather finally turns and the S&P 500, which has risen 22% in the last 12 months, to keep on climbing this year. That was despite former Fed chief Ben Bernanke firing the starting gun on tapering the central bank’s asset purchases before handing over the reins to Janet Yellen.
 
However, the surge in debt above the S&P’s rise is something any one with even the faintest interest in stock markets should keep an eye on, especially if the stand-off between the West and Russia over Ukraine turns nasty.

Tags:
Economy

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